President Donald Trump’s US tariff whiplash and the Chinese yuan’s trajectory will likely keep Asian currency volatility elevated.
Currency volatility across the region has jumped ever since the larger-than-expected new US tariffs were announced last week, while foreign currency options signal increased bearishness.
Concerns over economic growth have also driven more aggressive bets that regional central banks will cut interest rates.
Uncertainty could remain high, even as Trump paused higher tariffs on most economies except China yesterday.
With Beijing’s warning of a “resolute” response, investors will be looking out for signs that the yuan will undergo a devaluation, a move that would make Chinese exports cheaper but risk capital flight.
The yuan reference rate, which guides traders, crossed the key 7.20 per dollar level on Tuesday.
“The Renminbi (RMB) is an anchor to emerging-market Asian currencies, so there’s no doubt there will be selling pressure across the markets here if China devalues the yuan,” said Ken Cheung, chief Asia FX strategist at Mizuho Bank Ltd.
“That could lead to a downward spiral in the Asian currency complex and ramp up volatility in markets,” Cheung said.
Volatility jumps
One-month implied volatility measures for emerging Asian currencies have jumped since the US tariff announcement, with the biggest moves seen in the yuan, won, rupiah and Taiwan dollar.
Volatility could remain elevated, as investors weigh the possible protracted negotiation period between US and Asian governments, the risk of a sharper devaluation in the yuan, and the US interest rate trajectory.
Bearish option signaling
Dollar-Asia one-month risk reversals have all jumped in April, signaling that the premium to hedge or to speculate on Southeast Asian currency downside over that period is rising as more investors position for losses.
Yuan options are indicating particularly bearish signs, with the dollar-offshore yuan risk reversals having jumped to the highest since 2022 this week.
Sensitivity to yuan
Among Southeast Asian currencies, the Singapore dollar and the baht appear to be the most vulnerable to a weakening in the onshore yuan.
They have the highest correlation with the onshore yuan, based on an analysis of weekly data over a five-year period.
A yuan devaluation between “5%-10% is possible within this year,” Omar Slim, co-head of Asia fixed income at PineBridge Investments, said in an interview Tuesday.
“Given yuan weakness, the Singapore dollar and the won could see some pressure,” he said.
China is a main trading partner of Singapore and South Korea.
In comparison, the currencies of the more domestic market-focused economies, such as the peso and rupee, are less vulnerable to any yuan devaluation risk.
Dovish bets
Traders have priced in more aggressive dovish wagers for regional central banks as tariffs are expected to significantly impact trade and growth in the region.
Baht swaps are pricing in 59 basis points of easing over the next six months, which is 7 basis points more than prior to the US tariff announcement.
Similarly aggressive bets on rate cuts are emerging for Malaysia and the Philippines.
Bangko Sentral ng Pilipinas cut policy rates by 25 basis points, as forecast by a majority of economists surveyed by Bloomberg.
