Bearish bets on Asian FX firm on US debt default risk, slow China recovery

Bearish bets were raised on most Asian currencies, as the possibility of an economically disastrous debt default in the United States and signs of a weak post-pandemic recovery in China triggered risk aversion, a Reuters poll found on Thursday.

Short bets intensified on nearly all Asian currencies, with those on the Chinese yuan CNY=CFXS, Taiwanese dollar TDW=TP, Malaysian ringgit MYR=, and Philippines peso PHP= reaching their highest since November, the fortnightly survey of 12 analysts showed.

The yuan weakened to its lowest level since December on Thursday, after crossing the 7 per dollar mark in the previous session.

Signs of a wobbly post-COVID recovery in the world’s second-largest economy dampened investors’ risk appetite, as broadly disappointing activity data for April fuelled the pessimism already generated by weak consumer price inflation data.

Given that the Chinese yuan is seen as an important anchor for the regional currencies, weakening yuan is driving other currencies weaker as well, said Khoon Goh, head of Asia research at ANZ.

Further weighing on Asian currencies were debates on raising the debt ceiling in the U.S. On Wednesday, President Joe Biden and top U.S. congressional Republican Kevin McCarthy underscored their determination to reach an agreement soon.

Republicans have refused to vote to lift the debt ceiling past its $31.3 trillion limit unless Biden and other Democrats agree to spending cuts in the federal budget.

“Until we see clarity around the debt ceiling, we are likely to see the U.S. dollar remaining high this month, hence the positioning has now turned more negative towards Asian currencies,” Goh added.

Investors were still long on Thailand’s baht THB=TH and the Indonesian rupiah IDR=, with both countries still generating current account surpluses.

The return of Chinese tourists to Thailand bolsteredbullish sentiment on the baht. The tourism-reliant economy expanded faster than expected in the first quarter and recorded a current account surplus of $4.8 billion, which was the highest in three years.

Thailand’s two election-winning parties are currently working to overcome the built-in advantage for a military-backed bloc, potentially ending the long military domination of politics.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long on U.S. dollars.

The figures include positions held through non-deliverable forwards (NDFs).
Source: Reuters (Reporting by Navya Mittal in Bengaluru; editing by Eileen Soreng)