Asian Currencies show resilience against higher US Yields, says Fitch

April 30, 2021 (MLN): The exchange rates of Asia-Pacific's largest economies proved resilient against the US dollar throughout the coronavirus pandemic crisis and the recent rise in US bond yields should make further gains in the coming months, says Fitch Ratings in a new report issued today.

The region's currencies have been supported by China's strong economic recovery, particularly the Australian dollar and Korean won, while high commodity prices have provided tailwinds for the Australian dollar and Indonesian rupiah. Lower external imbalances in Indonesia and India have better supported the countries' currencies during the recent episode of market volatility relative to the sell-off in 2013.

Fitch's empirical analysis - based on estimating 'fair value' models for six major Asian currencies against the US dollar - also shows that, historically, most Asian currencies have been more sensitive to US short-term interest rates rather than longer-term US bond yields. The Japanese yen and rupiah stand out as being the most sensitive to rising US long-term bond yields.

The report found out that the Indian rupee responds strongly to global risk aversion, but holds up against US interest rate rises, while the yen and won react more to real interest rates, possibly due to the influence of domestic investors with long-term horizons.

In contrast, the Chinese yuan and Australian dollar are sensitive to short-term nominal interest rate differentials, perhaps consistent with shorter-term investment horizons, such as carry-trade strategies.

With the Fed likely to keep the short-end of the US yield curve firmly entrenched at its current low level, Fitch believes that most Asian currencies have scope for small gains in coming months, having already regained some ground in recent weeks, following the February-March sell-off.

Downside risks to Fitch’s currency forecasts include much higher the expected US inflation pressure, which will prompt a faster-than-anticipated rise in US yields and a strong broad-based US dollar appreciation trend.

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