These EM Asian Currencies Best Placed to Face Rising U.S. Yields
Chinese one-hundred yuan banknotes are arranged for a photograph in Seoul, South Korea. (Photographer: SeongJoon Cho/Bloomberg)

These EM Asian Currencies Best Placed to Face Rising U.S. Yields

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(Bloomberg) -- Emerging Asian currencies can extend their fourth-quarter rally, even if U.S. Treasury yields continue to rise.

That’s the upshot of a Bloomberg analysis of nine currencies in the region that shows the yuan, won, Indian rupee and Taiwanese dollar have been the strongest performers during periods of rising U.S. yields -- provided the gains are gradual and associated with an increase in growth expectations. By contrast, the Philippine peso and rupiah have proved vulnerable however fast yields climb, according to the six-year study.

The Bloomberg JPMorgan Asia Dollar Index is up almost 2% since benchmark 10-year Treasury yields hit their September low of 1.43%. Having climbed to 1.80% since, investors are wondering whether that marked a trough amid signs of an improving global economy. While yields slipped back after the Federal Reserve signaled Wednesday it would stay on hold through 2020, four officials saw a rate hike as appropriate, according to its latest quarterly forecasts.

The study tracked total returns for Asian currencies during five periods of gradual rises in U.S. yields and 10 of rapid increases. The table below shows median returns for each currency, scaled to make them equivalent to a 1% rise in U.S. yields. A measure of consistency of the moves is also included.

Returns when

U.S. yields

rise slowly

Consistency

(Avg. move/std.

deviation

Returns when

U.S yields

rise rapidly

Consistency

(Avg. move/std.

deviation)

KRW+4.1%+0.57-0.1%-0.24
CNY+3.2%+0.77-0.2%+0.12
INR+1.9%+0.30-1.4%-0.49
TWD+1.8%+0.77-1.0%-0.24
THB+1.4%-0.31-3.0%-0.37
SGD-1.1%-0.17-2.7%-0.58
PHP-2.0%-0.19-2.0%-0.83
IDR-2.7%-0.38-3.4%-0.71
MYR-3.4%-0.13-2.5%-0.36
Source: Bloomberg

When U.S. Yields Rose Gradually - Key Takeaways

  • The Thai baht shows a significant shift depending on the size of the nation’s current-account surplus.
    • During the 2013-2015 period, when the current-account surplus averaged 1.5% of gross domestic product, the currency sold off significantly on the two occasions when U.S. yields rose
    • However, over the 2017-2019 period when the surplus averaged 7.9% of GDP, it appreciated on all three occasions
  • The Malaysian ringgit has strengthened in the past two episodes likely because the currency has become less influenced by foreign capital flows after November 2016’s significant clamp-down on offshore trading
  • The Philippine peso results have been consistently negative with the currency depreciating on the first four occasions in the study, possibly because the country is not as integrated with the global manufacturing economy as other Asian peers
  • All the currencies strengthened in the final period of the study in early September because of the significant decline in U.S.-China trade tensions

When U.S. Yields Spiked - Key Takeaways

  • The won and yuan remained largely unscathed during a rapid increase in U.S. yields
    • With an export machine highly-geared to the global economic cycle, low yields and limited foreign holdings of local debt, South Korea enjoys out-sized benefits from higher growth expectations
  • The rupiah, Singapore dollar and the Philippine peso are especially vulnerable
    • Like the Philippines, Indonesia has low export intensity, high yields and relatively open capital account. Foreigners also own a high percentage of local-government bonds.
    • Singapore’s poor performance is probably due to its responsiveness to components of its trade-weighted exchange rate

Periods Covered

U.S. Yield PathPeriod

Gradual Rise

  • Average of 69 basis points
  • Average of 133 days
  • July 1 - Dec. 31, 2013
  • Jan. 30 - July 20, 2015
  • July 8 - Oct. 27, 2016
  • Sept. 7, 2017 - Oct. 9, 2018
  • Sept. 3 - Nov. 11, 2019

Rapid Rise

  • Average of 55 basis points
  • Average of 36 days
  • May 7 - Sept. 5, 2013
  • Oct. 23, 2013 - Jan. 2, 2014
  • April 17 - June 10, 2015
  • Nov. 4 - Dec. 16, 2016
  • Feb. 24 -March 13, 2017
  • Sept. 7 - Oct. 26, 2017
  • Jan. 1 - Feb. 26, 2018
  • April 2 - May 17, 2018
  • Aug. 24 - Oct. 3, 2018
  • Sept. 3 -Sept. 13, 2019

NOTE: Simon Flint is an EM macro strategist, who writes for Bloomberg. The observations he makes are his own and not intended as investment advice

©2019 Bloomberg L.P.

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