Fear Factor Lingers Even After China Moves to Bolster Yuan

(Bloomberg) -- Nobody should be fooled. Currencies were looking a lot less vulnerable after China surprised pretty much everyone today by fixing the onshore yuan below 7 per dollar, but the rally across foreign-exchange markets was a fragile one. In fact, only the Taiwanese dollar managed to strengthen more than 0.2% among the Asian currencies, and the Philippine peso, Indonesian rupiah and Malaysian ringgit remained weaker, occupying the bottom three places on the emerging-market scorecard. The rand was the stand-out winner, appreciating for the first time in five days with a 0.6% gain. Stocks were even less impressed though, with China’s Shanghai Composite and South Korea’s Kospi leading the MSCI index lower for a 10th day, the longest losing sequence since June 2015. Meanwhile yield spreads on emerging-market sovereign bonds were an average 1 basis point narrower versus a rising Treasury curve.

Underlying Fear

The stronger-than-expected fixing, coupled with an announcement that the government would sell yuan-denominated bonds in Hong Kong, came after President Donald Trump labeled China a currency manipulator -- hardly a sign of easing tension between the two trade-war protagonists. So the underlying fear factor is no less prevalent that it was 24 hours ago. And that’s little comfort in the light of the increased vulnerability of emerging markets to the yuan’s moves. Bloomberg’s Netty Ismail shows in a chart today how the correlation between the yuan-dollar rate in the offshore market and the currencies of the developing economies has never been greater.

Standout Baht

Which makes the performance of the baht all the more impressive. The Thai currency, famously at the epicenter of the 1997 Asian financial crisis, has remained little changed during this month’s trade-war turbulence, while peers such as the rupee and the won have weakened more than 3 percent, as noted by reporters Lilian Karunungan and Suttinee Yuvejwattana in a piece today. Anyone who’s followed the Thai story will know that the country’s authorities aren’t too happy with the current level of the baht, which Bloomberg Economics says is some 18% overvalued. Most economists expect the central bank to stand pat when it decides rates tomorrow, but the latest events surrounding the yuan might just have increased the odds of a surprise cut, as evidenced by moves in the swaps market Friday and Monday.

Awkward Auction

It’s a big day in South Africa today, with the government preparing to issue a record amount of bonds at a weekly auction as it increases borrowing to raise funds for Eskom Holdings SOC Ltd., the struggling state power company. The timing is unfortunate though. As Colleen Goko reported from Johannesburg yesterday, yields on benchmark government debt have jumped to the highest in two months amid the current trade-war turmoil, meaning President Cyril Ramaphosa’s bailout plan for Eskom will come at an extra cost.

Poland’s Yield Moment

Poland has finally joined the world’s negative-yielding bond club. As the global stock of debt that gives holders a negative return surpassed $15 trillion yesterday, yields on Poland’s euro-denominated green bonds due in March 2029 briefly dropped below zero as they followed German bunds. As Bloomberg’s Warsaw-based reporters Adrian Krajewski and Maciej Onoszko wrote, this makes Polish Eurobonds the first from central and eastern Europe to trade at a negative yield at such a maturity. Latvia and Lithuania may be next in line.

©2019 Bloomberg L.P.

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