The outlook for most Asian currencies has dimmed as investors increase bearish bets to multi-month highs. This shift is driven by a strengthening U.S. dollar, fueled by expectations of fewer interest rate cuts by the Federal Reserve, and concerns over potential U.S. tariffs impacting risky Asian assets. A recent Reuters poll highlights the growing pessimism surrounding the region’s currencies.
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Short Bets Surge on Asian Currencies
The poll, which surveyed 13 respondents, revealed a significant increase in short positions on several key Asian currencies. Bets against the Chinese yuan reached their highest level since June 2023, while those targeting the Malaysian ringgit and the Indonesian rupiah climbed to a seven-month high. The yuan, currently trading near 16-year lows against the dollar, is particularly vulnerable to a stronger dollar and potential trade tensions.
China’s crucial role as Southeast Asia’s primary trading partner amplifies the regional impact of a weakening yuan. A depreciating yuan could trigger a domino effect across regional currency markets, exacerbating existing economic pressures.
Impending Policy Shifts Fuel Uncertainty
Market sentiment towards Asian assets has soured in anticipation of policy changes under the incoming U.S. administration. Proposed tax cuts, potential tariff hikes, and tighter immigration policies are expected to boost U.S. prices, bond yields, and the dollar, further diminishing the appeal of Asian investments.
Furthermore, the Federal Reserve’s revised projection of two rate cuts for 2025, down from earlier estimates, has solidified market expectations of a more gradual easing of monetary policy. Markets are now fully pricing in only one 25 basis-point rate cut in 2025, with a 60% probability of a second reduction. This shift towards a less dovish stance by the Fed reinforces the dollar’s strength and its yield advantage, potentially triggering capital outflows from emerging Asian markets and weakening their currencies.
Central Banks Face Difficult Choices
The evolving macroeconomic landscape presents a dilemma for central banks in Asia. “The external environment may constrain how far Asia central banks can ease with Asia FX weakness seen since the start of the Fed cut cycle,” DBS analysts noted. The Federal Reserve’s 100 basis-point rate cut since September has further complicated the situation.
DBS highlights the conflict between domestic and external priorities for Asian central banks. Less export-oriented economies might experience lower price volatility, offering some respite from the broader regional trend.
Bearish Sentiment Extends Across Asian Markets
The bearish sentiment extends beyond the Chinese yuan, ringgit, and rupiah. Short positions on the Taiwan dollar reached their highest point since May 2024, while bets against the Indian rupee, which recently suffered its ninth consecutive weekly decline, hit a peak since July 2022. Short positions on the Singapore dollar also rose to their highest level since October 2022.
Citi analysts warn that even economies like Singapore, potentially shielded from direct tariff impacts, remain vulnerable to indirect consequences. “While Singapore could be directly protected from escalation of U.S. tariffs, it would still be significantly exposed to the indirect impact via slower global growth and spillovers from a slowdown in China’s exports,” they stated. Citi anticipates that the Monetary Authority of Singapore (MAS) will ease policy settings in January in response to recent disinflation and challenges to growth resilience.
In conclusion, the confluence of a strengthening dollar, anticipated U.S. policy changes, and a less accommodative Federal Reserve has created a challenging environment for Asian currencies. Rising bearish bets across the region reflect growing concerns about the outlook for these economies in the face of external pressures. Central banks in Asia face difficult choices as they navigate the complexities of domestic and international economic forces.
