Hong Kong: Options traders are positioning for gains in South-East Asian currencies as the US Federal Reserve’s (Fed) anticipated rate cuts along with strength in the yen and yuan boost optimism in the region.
A Bloomberg gauge of South-East Asia’s average one-month risk reversals has risen to the highest in nearly five months. It signals that the premium to hedge or to speculate on South-East Asian currency upside over that period is rising as more investors position for gains.
“The demand for more protection against US dollar weakness amid speculation of Fed rate cuts this year is also driving up the demand for South-East Asia’s risk reversals,” according to Stephen Chiu, chief Asia forex and rates strategist at Bloomberg Intelligence in Hong Kong.
Chiu says US dollar/South-East Asia risk reversals can fall further – which would mean gains for the Bloomberg gauge – as the Fed’s first rate cut is likely in September, although US elections could cause a rebound.
While market convention is to cite US dollar/South-East Asia risk reversals, the gauge is the inverse of the average of one-month risk reversals for Thailand, Indonesia, Singapore, Malaysia and the Philippines.
The yen rose over 7% versus the US dollar in July as anticipation built that the Bank of Japan will hike interest rates, which was delivered Wednesday.
The onshore yuan snapped a six-month losing streak over the same period, with the 120-day correlation between the Chinese and Japanese currencies close to a record high.
These moves matter for South-East Asian nations as China is their main trading partner and the simultaneous advances in the yen and yuan weigh on the US dollar.
However, risk reversals of currencies from smaller economies can also be impacted by large hedging flows, not necessarily market sentiment, said Alvin Tan, head of Asia forex strategy at RBC markets.
The one-month US dollar-offshore yuan risk reversal fell to minus 1.05 this week, the most negative on record in data going back to 2011.
“Yuan sentiment has now become far less bearish and in fact has seen one of the biggest shifts in risk reversal skews among emerging market currencies recently,” Barclays Bank Plc strategists including Mitul Kotecha and Lemon Zhang wrote in a note last Friday.
South-East Asian currencies are are already starting to appreciate.
The Indonesian rupiah, Malaysian ringgit and Thai baht posted their biggest monthly gains this year in July. — Bloomberg
