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Asian Currency Correction Could Signal Looming Crisis

Hong Kong

Global trade war fears are intensifying ahead of Trump’s vow to slap $60 billion in tariffs on China, while the U.S. dollar is gaining strength in the wake of a Fed rate hike. Asian currencies already appeared to be on the verge of a correction after completing the best year in two decades.

Now their showing their weaknesses--and the warning sign is Indonesia’s rupiah, which slumped to a two-year low last week, with investors sinking their bearish claws into the currency further on Thursday.

The rupiah is seen as a bellwether of sorts for Asia given the high foreign ownership of the nation’s bonds. The currency is typically among the first in the region to be sold when sentiment sours, and this often heralds a broader decline among its peers.

The rupiah has tumbled 1.6 percent in the past month, the worst performer in Asia and third-worst among 24 emerging-market currencies worldwide. It fell as overseas investors sold the nation’s stocks and bonds, and equity volatility jumped due to expectations of higher U.S. interest rates.

Source: Bloomberg

“Indonesia’s rupiah is arguably the high-beta version of Asian ex-Japan risks,” Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore, told Bloomberg. “The declines are certainly not peculiar to IDR. Nor are they conclusively behind us. The upshot is that with uncertainty around global trade risks, global liquidity is set to start declining, albeit gently, later this year. AXJ air-pockets are anticipated.”

The Bloomberg JPMorgan Asia Dollar Index, which measures 10 of the region’s currencies against the greenback, climbed 6.7 percent last year, the biggest annual advance in data that started in 1994.

If the rupiah proves to be the canary in the coal mine, the gauge may give back a lot of those gains this year. Related: Good News For Gold Bulls Despite Interest Rate Hike

This week was even worse, with investors on Thursday increasing their bearish bets at a level higher than any time since 2016.

And the rupiah isn’t the only weakening Asian currency. Bets on the Indian rupee—one of the year’s worst performers--moved into bearish territory more so than at any point since the fourth quarter of 2016. Long positions in the Malaysian ringgit were also at a five-month low, according to a Reuters poll, and the Thai baht also saw more bearish movement, along with the Korean won and the Singapore dollar. The Reuters polls showed no change in bullish bets on the Chinese yuan, however.

Regional currencies may suffer due to a resurgent dollar. The greenback has rallied since new Federal Reserve Chairman Jerome Powell delivered upbeat testimony to lawmakers in late February. His acknowledgment of stronger U.S. economic growth fueled speculation the central bank may raise interest rates as many as four times this year.

There are signs other Asian currencies are also starting to weaken, with the Philippine peso dropping to the weakest since July 2006 last month. South Korea’s won and the Indian rupee both slid to three-month lows in February.

Declines in the rupiah have often foreshadowed losses among Asian peers. In January 2016, the Asia Dollar Index slumped to a seven-year low, months after the rupiah sank to the weakest since 1998.

Analysts speaking to Reuters, however, sought to tone down the fears over weakening Asian currencies, saying that while U.S. interest rates will likely undermined the rupee and rupiah, it won’t be as bad as the Fed’s 2013 ‘taper-tantrum’. 

“The main difference is that the economic fundamentals in both India and Indonesia are much improved compared to 2013, Khoon Goh, head of Asia research at ANZ Banking Group in Singapore, told Reuters. “While both countries still run current account deficits, the deficits have improved much in the last four to five years.”

By Josh Owens for Safehaven.com

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