For BlackRock, Yuan is key to ongoing rally in Asian currencies

07/06/2017 02:36 AST

On a winning run thanks to the downtrodden dollar, Asian currency bulls have something else to smile about — the yuan. The Chinese currency’s unexpected surge over the past two weeks has put it atop the Asian leader board, with the gains, thought to be largely engineered by policy makers, turning around a weakening trend in the yuan. That’s helped underpin the Asian rally, which has seen currencies like the Malaysian ringgit to the Thai baht hit multi-month highs on uncertainty over the outlook for US monetary policy after next week’s anticipated interest-rate hike.

“China is an important linchpin of Asia from growth from an FX standpoint,” said Neeraj Seth, head of Asian credit in Singapore at BlackRock Inc., the world’s largest money manager. The yuan’s bounce “further strengthens the view that we are in a more stable Asian currency regime right now.”

Rather than being a source of disruption for Asia — as it was during its sudden devaluation in August 2015 — the yuan is serving as an anchor for the market given the recovery in China’s economy and its role as the region’s chief trading partner.

Medium term, Seth sees more stability in the yuan. “Not necessarily a one-way path of appreciation, but more of keeping the currency stable, which obviously provides a very supportive backdrop,” he said.

Read more: The theories on why China has been supercharging its currency Traders appear to have been emboldened by the yuan’s move higher. The average one-month cost of hedging losses in Asian currencies — a way of measuring bearish sentiment based on risk-reversal rates — has been falling over the past two weeks.

Meanwhile, the Bloomberg JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies outside of Japan, has spiked higher, rising 0.6 per cent since May 24, the day before the yuan’s upward trend started in earnest. China’s currency has strengthened 1.3 per cent onshore versus the US currency during the same period.

The average premium on contracts giving the right to sell nine regional currencies versus those to buy has fallen to 0.69 percentage point, approaching this year’s low reached in March, the least since 2014. The spread for the yuan turned negative in late May for the first time since 2013:

“We look at Asian emerging-market currencies at two levels,” Seth said. “Sometimes it’s the dollar driving all of the direction, or it could be one country versus the other. You can’t just look at a single factor.” ‘

For other market watchers, it remains mostly about the US currency, with the yuan’s hey day as a regional influencer yet to be cemented.

Gulfnews