THE outlook for emerging Asian currencies is worsening again after US President Donald Trump announced new tariffs on China, curbing optimism that his threats were mainly bargaining ploys.
Regional currencies have tumbled over the past week, with the Thai baht and South Korean won both sliding about 2 per cent, as rising fears over a global trade war sapped risk appetite. Asian currencies have also unwound part of their January rally as a number of central banks in the region cut interest rates to support growth.
There are “significant risks” to the outlook for Asia currencies, “especially if the US administration adopts a more aggressive tariff policy against Asia,” said Eric Lo, a fund manager for pan-Asian bonds at Manulife Investment Management in Hong Kong. “Additionally, we believe that the preference of Asian central banks to cut policy rates this year could limit the appreciation of Asian currencies.”
A Bloomberg index of emerging Asian currencies has dropped about 0.8 per cent over the past week as Trump announced an additional 10 per cent tax on Chinese imports, along with 25 per cent tariffs on Mexico and Canada. That decline accelerated a retreat in the gauge from a two-month high set on Feb 24 .
The renewed tariff fears have added to range of headwinds facing Asian currencies. Central banks in South Korea and Thailand are among those that have recently cut rates to bolster growth, putting them at odds with their global peers in countries such as Brazil. Asian currencies have also been dragged lower as the US dollar rallied amid an increase in demand for the greenback following Trump’s election victory.
“It’s hard to get excited about FX performance in the region,” said Rob Drijkoningen, co-head of the emerging markets debt team at Neuberger Berman Asset Management in The Hague. Among the negatives are the fact that yields are relatively low across the region, and also the US tariff pressures on China even though they are unlikely to rise as high as the original threat of 60 per cent, he said.
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Drijkoningen said his fund was buying assets of countries that have a lower correlation with the US to help reduce the volatility, such as Brazil and Sri Lanka.
Emerging Asian currencies are set to see increasing volatility this year due to concerns over rising global trade frictions, though they could get some relief if the US economy finally starts to show signs of a slowdown, according to abrdn.
“Asian currencies could only remain strong against the US dollar if the US growth numbers remain weaker-than-expected, which would lead to a more dovish Federal Reserve and potentially, a less mercantilist US state,” said Edmund Goh, investment director of fixed income for Asia at abrdn in Singapore.
Goh said he is careful about positioning “too aggressively” in Asian currencies at the moment, and currently prefers local-currency bonds from countries such as Indonesia and India. BLOOMBERG
