Volatility Traps Threaten Asia Currency Traders This Summer
Asia investors hunkering down for a lull in currency market volatility this summer may be in for a shock.
(Bloomberg) -- Asia investors hunkering down for a lull in currency market volatility this summer may be in for a shock.
Two of the region’s highest-yielding currencies -- Indonesia’s rupiah and India’s rupee -- look particularly vulnerable in July and August, when liquidity is traditionally thinner as traders take their holidays, according to analysts. Surging coronavirus infections, billion dollar stimulus measures and controversial debt monetization plans threaten to reignite volatility.
“Trading volumes tend to decline during the Northern hemisphere summer holiday period, but that does not necessarily mean that FX volatility will be subdued,” said Khoon Goh, head of Asia research at Australia and New Zealand Banking Group Ltd. “There is more scope for currencies to do more of the adjustment to economic shocks,” with central banks not increasing rates for a while.
The rupiah posted its biggest weekly drop against the dollar since March last week as investors dumped Indonesian assets on concerns around the nation’s expanding debt monetization plans. At the other end of the spectrum, India’s rupee climbed 1.3% against the greenback, its best weekly gain since early May on improving capital inflows.
Indonesia’s currency in particular will be more susceptible to fluctuations in sentiment, according to TD Securities. The rupiah has the highest one-month implied volatility of all emerging Asian currencies, data compiled by Bloomberg shows.
“The rupiah is higher beta than the rupee, and suffers more from periods of illiquidity and periods of higher volatility,” said Mitul Kotecha, senior emerging markets strategist in Singapore. “Despite expectations of a summer lull in markets, there has been plenty of occasions when risk aversion and consequently volatility has spiked in the summer months.”
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With economic growth ever more dependent on the effectiveness of stimulus, market participants are bracing for a return of price swings.
“If the second quarter was about grappling with the virus, these coming months will demand even more attention to detail about re-openings of economies and deeper geopolitical tensions,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Investors can at times be more complacent in 3Q.”
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