Portraits of Indonesia’s first President Soekarno, left, and former Prime Minister Mohammad Hatta are displayed on a 100,000 rupiah banknote in an arranged photograph in Thailand. (Photographer: Brent Lewin/Bloomberg)

Asian Currencies Are Winning Over Fund Managers

(Bloomberg) -- Global investors are already warming to emerging-market Asian currencies -- all they want now is a positive sign on trade from Presidents Xi Jinping and Donald Trump.

Slumping oil prices, pro-active central banks and lowered expectations for Federal Reserve rate hikes have renewed the appeal of one of the year’s most beaten down asset classes, according to conversations with fund managers including Amundi SA and Nikko Asset Management Co. A de-escalation of the trade war would set the stage for a sustained Asian FX recovery, they said.

“We have turned more positive on Asian currencies following encouraging signs that both the U.S. and China were willing to talk at the upcoming G-20 summit,” said Delphine Arrighi, an emerging market fund manager at Merian Global Investors in London. “We think that this trend can continue if we see a de-escalation of the trade war tensions.”

Though still down 5 percent this year, the Bloomberg JPMorgan Asia Dollar Index has eked out a more than 1 percent gain in November, thanks to a rebound in its worst performers as global funds start to return to Indonesia, India and the Philippines. The rupiah and the rupee led a surge in emerging market currencies Thursday after Federal Reserve Chairman Jerome Powell opened the door for a potential pullback in interest-rate hikes for 2019.

Asian Currencies Are Winning Over Fund Managers

Here are some of the bullish signals fund managers are pointing to that could help this burgeoning recovery continue.

Dovish Fed

A growing debate over the likelihood of a Federal Reserve rate-hike pause has traders dialing back their interest-rate expectations, which should bring some relief to Asia’s currency markets. Fed Chairman Jerome Powell said on Wednesday in New York that interest rates are “just below” the so-called neutral range, spurring speculation central bankers are increasingly open to pausing.

Asian Currencies Are Winning Over Fund Managers

“One important reason that led to EM currencies depreciating substantially this year was the firm rate hike path the Fed embarked on,” said Edward Ng, a fixed-income portfolio manager at Nikko Asset Management in Singapore. A slowing global economy and possible inflation peak which could cause the Fed to moderate the tightening momentum may be the key supporting factor for the currencies in the near term, he added.

Asian Currencies Are Winning Over Fund Managers

Dollar and Yuan Trend Reversal

An end to the recent rally in the greenback and an easing of the downward pressure on China’s yuan would also help regional Asian currencies consolidate their recent gains, the fund managers said. Citigroup Inc., Goldman Sachs Group Inc and Morgan Stanley are among global banks calling for dollar weakness in 2019.

“The USD is crucial, but so is the outlook for the CNY, which is arguably as important for EM FX trends,” said Dwyfor Evans, head of Asia-Pacific macro strategy at State Street Global Markets in Hong Kong. “The Chinese authorities will not permit the CNY to break through the 7-handle, and if stability is maintained in the renminbi, then regional currencies can also stabilize, particularly if the Fed signals a pause in rate hikes for next year.”

Asian Currencies Are Winning Over Fund Managers

Oil Collapse

A decline in Brent oil prices of more than 30 percent from last month’s four-year high has come as a blessing for most Asian nations, which rely on imports to meet their energy demands. The Indian rupee is seen as most exposed, alongside its Indonesian counterpart.

“We think the environment is getting more conducive in the coming months,” for EM Asian currencies due to a sharp decline in the oil price which is likely to remain low in coming months on higher supply, said Tuan Huynh, chief investment officer for Asia Pacific at Deutsche Bank Wealth Management.

Asian Currencies Are Winning Over Fund Managers

Proactive Central Banks

The worst Asian performers have led the turnaround this quarter, as policy makers in Indonesia, the Philippines and India hiked rates, led intervention and introduced measures to bring in foreign investors, with some success. The currencies of all three countries have advanced, while bond yields have tumbled.

“Many Asian central banks are pre-emptively raising interest rates to defend their currency, such as Indonesia, India and the Philippines,” said Deutsche Bank’s Huynh. “Thailand, Taiwan and Korea’s central banks may also raise rates soon. The active rate hike measures of the Asian central banks could give more support to their currencies in coming months.”

Asian Currencies Are Winning Over Fund Managers

Trade Truce

The icing on the cake for fund managers bullish on Asian currencies would be a de-escalation in the trade dispute between the world’s two largest economies. All eyes are now on the upcoming meeting at the Group -of-20 summit this week, with traders not ruling out the possibility of a truce.

“With the approaching of the G-20, there may be some hope for some de-escalation on the trade tension,” said Esther Law, the senior investment manager for emerging-market debt at Amundi Asset Management in London.

“Although we don’t expect a major deal at the G-20, we think signs from both parties of a willingness to reach an agreement would be supportive of Asia FX and EM overall,” said Merian’s Arrighi.

Asian Currencies Are Winning Over Fund Managers

Devil’s Advocate

Still, not everyone is ready to call for an end to the region’s troubles. For Deutsche Bank AG chief economist Michael Spencer, the “considerable” pressure emerging Asian nations experienced this summer may not be over, especially if people become “reconvinced” the Fed will raise rates more than the market seems to be pricing in.

“I think we haven’t seen the end of that,” he said, speaking on Bloomberg Television Thursday. “I think you should expect in those countries, particularly in Indonesia and the Philippines, that growth moderates very gradually but interest rates at the short end and the long end keep rising and the currencies probably keep depreciating, at least through the middle of next year.”

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