Asia FX bears hit record high on hawkish Fed

June 16, 2022: Bearish bets on several Asian currencies hit a record high in the face of rising U.S. interest rates that supported the dollar, while repeated COVID-19 lockdowns threatened to disrupt economic recovery in China, a Reuters poll found on Thursday.

Short positions in the South Korean won, the Singapore dollar, the Malaysian ringgit, and the Philippine peso hit their highest on record, according to the fortnightly poll of 10 respondents.

The greenback was perched at a two-decade high this week, as red-hot U.S. inflation data increased the likelihood of more aggressive interest rate hikes from the Federal Reserve.

On Wednesday, the Fed delivered a widely anticipated 75 basis point (bps) hike that markets deciphered as a proactive move to curb inflationary pressures, helping Asian currencies firms. The poll responses were collated before the Fed's decision.

"We expect investor sentiment to remain fickle and financial market conditions to stay choppy into 3Q22," Selena Ling, head of research and strategy at OCBC wrote in a note, adding, the scale of the Fed's hikes this year may be between 50 bps and 75 bps.

The Fed's rate decisions have often been a yardstick for local central banks to frame policy. However, given the lagging pace of economic recovery from COVID-19 in emerging Asia, the pace of hawkish policy among regional central banks may vary.

Further complicating matters is China's strict zero-COVID stance, which has led to major cities slipping in and out of lockdowns, raising concerns about a sputtering rebound in the world's second-largest economy.

"I see a high possibility that China will still endure repeated Omicron lockdowns this year unless it changes its COVID-zero policy," said Jeffrey Halley, senior market analyst, Asia Pacific, OANDA.

"China's growth outlook remains challenging to say the least, even more so if key export markets shift to slowing growth as tighter monetary policy bites."

Short positions in China's yuan hovered near an all-time high hit last month.

Elsewhere, bearish bets on Indonesia's rupiah were at their highest since April 2020. The currency sank to its lowest since October 2020 earlier this week.

Market participants were also downbeat on the Indian rupee that hit a record low on Monday, with short positions at a more than three-and-a-half-year high.

India's wholesale prices recorded their fastest annual rise in more than 30 years, raising expectations for more rate hikes by the central bank, data showed this week.

Reuters