Since mid-November, China's central bank has been setting its daily official yuan midpoint guidance stronger than anticipated. Investors have maintained short positions on most Asian currencies as they assess the potential impact of escalating global trade tensions following U.S. President Donald Trump's tariffs on major trading partners. A Reuters poll revealed bearish sentiment on several Asian currencies, including the Malaysian ringgit, South Korean won, Taiwan dollar, and Indonesian rupiah. Despite these challenges, some currencies have shown resilience due to factors like a broad decline in the U.S. dollar and concerns about slowing U.S. economic growth.
The Indian rupee and Indonesian rupiah have been among the worst-performing Asian currencies this year, influenced by foreign portfolio outflows and increased hedging. Meanwhile, short bets on the Chinese yuan have eased, supported by Beijing's economic policies and strong domestic consumption. The Philippine peso has also seen reduced bearish bets, while the Singapore dollar remains relatively stable. Overall, market participants are cautious but not significantly increasing their short positions until there is more clarity on U.S. economic recovery.
Resilience Amidst Trade Uncertainty
Despite global trade tensions, some Asian currencies have demonstrated remarkable resilience. The strength of these currencies can be attributed to various factors, such as the broader decline of the U.S. dollar and concerns over slowing U.S. economic growth. Market players remain cautious about significantly increasing their short positions until there is clearer evidence of U.S. economic recovery. This cautious approach is particularly evident in currencies like the Singapore dollar, which has been the best regional performer this year, and the Philippine peso, where bearish bets have hit their lowest levels since January 2024.
The resilience of certain Asian currencies underscores the complex interplay between global trade dynamics and local economic conditions. For instance, the Bank of Thailand recently cut interest rates to support the economy and weaken the local currency, aiming to boost exports. Barclays analysts suggest that while the central bank highlighted structural economic issues, global trade tensions are a significant concern. Similarly, the Chinese yuan has benefited from Beijing's ambitious economic growth targets and increased domestic consumption, helping to mitigate losses despite new U.S. tariffs. These factors contribute to a mixed outlook for Asian currencies, with some showing signs of stability amid global uncertainty.
Challenges for Vulnerable Currencies
Several Asian currencies face significant challenges due to ongoing global trade tensions and other economic pressures. The Indian rupee and Indonesian rupiah have been among the hardest hit, reflecting vulnerabilities such as foreign portfolio outflows and increased hedging activities. Analysts at DBS highlight that India's higher tariff rates compared to the U.S. and its Asian peers make the country susceptible to retaliatory actions. This vulnerability has contributed to the rupee's fifth consecutive monthly fall in February, making it the most shorted among Asian currencies.
The Malaysian ringgit, South Korean won, Taiwan dollar, and Thai baht have also seen increased bearish positions, according to the Reuters poll. The Thai baht, in particular, saw a recent interest rate cut by the Bank of Thailand, aimed at supporting the economy and weakening the currency to enhance export competitiveness. However, the effectiveness of such measures remains uncertain given the broader context of global trade tensions. Additionally, the Chinese yuan's midpoint guidance set by the central bank has been stronger than expected, providing some support against the backdrop of U.S. tariffs. Nonetheless, the overall outlook for vulnerable Asian currencies remains cautiously pessimistic, with market participants closely monitoring developments in global trade policies and economic indicators.