ANZ Bank: Returns on Asian currencies hit a four-year high, but sharp exchange rate fluctuations are causing carry trades to ‘lose steam.’
ANZ Bank pointed out that despite the yields of emerging Asian currencies reaching near four-year highs, the significant exchange rate volatility still makes carry trades unattractive.
According to Zhitong Finance APP, ANZ Bank noted that despite emerging Asian currencies reaching near four-year highs in yield, sharp exchange rate fluctuations still make carry trades unattractive. This strategy of “borrowing low-yielding currencies and buying high-yielding ones” has gained new momentum in the region due to elevated oil prices. Earlier this month, Bloomberg’s index tracking three-month forward implied yields for seven emerging Asian currencies rose to 1.36%, the highest level since June 2022. However, at the same time, JPMorgan’s emerging market FX volatility index hit a near one-year peak last month.
Khoon Goh, Head of Asia Research at ANZ Bank, stated: “Higher implied yields reflect market expectations that central banks may need to tighten policies. While this enhances attractiveness from a carry trade perspective, uncertainties in the geopolitical environment mean headline-driven spot price fluctuations could easily offset any yield advantage.”
Following the rise in oil prices driven by the conflict in Iran, investors have continued to bet on central banks raising interest rates to curb inflation. If the Strait of Hormuz, a key energy transport route, remains closed or restricted, oil prices may spike further, making oil-importing countries like South Korea, Thailand, and the Philippines more vulnerable to accelerated price increases. Consequently, earlier this month, implied yields for emerging Asian forwards surged past similar indicators in Europe, the Middle East, and Africa.
The Korean won swap market anticipates three 25-basis-point interest rate hikes over the next 12 months, while the Thai baht swap market expects nearly 25 basis points of hikes during the same period. Traders in the Philippines are pricing in a 25-basis-point rate hike within the next three months.
Stephen Chiu, Chief Asia FX and Rates Strategist at Bloomberg Intelligence, pointed out that under the current supply-side shock scenario, “higher carry returns may not be the key driver for currency strength; instead, focus should remain on fundamentally robust currencies such as the renminbi, Singapore dollar, ringgit, and Hong Kong dollar.”
