By Sameer Manekar

(Reuters) – Bearish positions on most Asian currencies firmed, a Reuters poll showed on Thursday, intensifying steadily from the start of the year as repricing of rate cut bets after strong U.S. economic data pushed the dollar higher.

Short bets on the Malaysian ringgit jumped to their highest level since mid-July last year, while those on the Indonesian rupiah hit an over five-month high, the fortnightly poll of 11 analysts showed.

The Korean won was the most shorted currency by the analysts polled, touching its highest level since October 2022, while bears fortified their positions on Singapore dollar to reach a six-month high.

A slew of strong U.S. economic data and persistent inflation prompted some Federal Reserve officials to temper down market expectations of the quantum of rate cuts this year, strengthening the dollar and casting a shadow over emerging currencies.

“The stronger dollar trend has certainly added to consternation among officials overseas, with the U.S. to some extent exporting its inflation problem to other countries through the dollar,” Michael Wan, senior currency analyst at MUFG wrote.

The Indonesian central bank reassured investors on Wednesday of intervening to help steady the rupiah, which has fallen about 5% so far this year and currently trading at a four-year low. The Bank of Korea also signalled readiness to deal with volatile currency moves.

Analysts at HSBC see the USD-Asia pairs to eventually moderate later in the year, assuming the Fed begins its policy easing cycle, geopolitical risks are manageable, and USD-RMB remains “reasonably contained”.

“The risk is that Asian currencies do not even mildly recover and end up going through yet another year of depreciation, if the Fed does not cut rates after all due to a re-accelerating U.S. economy,” HSBC said in a note.

Meanwhile, short bets on the Chinese yuan ticked higher to reach their highest level since early November, even as the central bank continues to push back against depreciation.

Analysts turned bearish on the top-performing currency in emerging Asia, the Indian rupee, for the first time since mid-December.

“INR weakness is playing catch-up to AXJ (Asia excluding Japan) weakness as a result of exogenous factors, including a revival of high for longer U.S. rates, lingering geopolitical risks in the Middle East, and renewed volatility in yuan and yen,” Christopher Wong, a currency strategist at OCBC said.

However, Wong added that the rupee’s “softness pales in comparison to regional FX” amid “carry allure, bond inclusion and expectations of policy continuity”.

The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.

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).

The survey findings are provided below (positions in U.S. dollar versus each currency):

DATE

18-Apr-24 1.25 1.59 0.8 1.32 1.24 0.43 1.42 1.19 1.28

4-Apr-24 1.18 1.09 0.42 1.13 1.17 0 1.15 0.62 1.35

21-Mar-24 0.92 0.82 0.33 0.6 0.92 -0.54 1.12 0.47 1.13

7-Mar-24 0.84 0.54 0.25 0.53 0.64 -0.59 1.14 0.52 1.05

22-Feb-24 0.7 0.4 0.2 0.2 0.7 -0.4 1.3 0.3 1.1

8-Feb-24 0.4 0.39 0.41 0.4 0.32 -0.17 1.07 0.28 0.72

25-Jan-24 0.37 0.9 0.28 0.51 0.49 -0.18 1.21 0.5 0.9

11-Jan-24 0.18 0.3 0.02 0.19 0.05 -0.15 0.72 0.09 0.03

14-Dec-23 0.02 -0.09 -0.22 -0.05 -0.33 0.34 0.58 -0.22 0.16

By Amanda Cooper

LONDON (Reuters) – The dollar fell for a second day on Thursday after a rare warning by the finance chiefs of the United States, Japan and Korea over the sharp decline in other currencies, which in turn offered the yen some rare respite.

The yen got a modest lift after Japan’s top currency diplomat Masato Kanda said finance leaders of the G7 reaffirmed their stance that excessive currency volatility was undesirable.

Strong U.S. economic data and persistent inflation have prompted investors to drastically rethink the chances of the Federal Reserve cutting rates any time soon. Tension in the Middle East has also added to the dollar’s safe-haven appeal.

The upshot has been that other currencies, particularly in Asia, have been battered. The yen has been pinned near 34-year lows, prompting several warnings from Japanese authorities as traders fret about possible intervention.

The United States, Japan and South Korea agreed to “consult closely” on foreign exchange markets in their first three-way finance dialogue on Wednesday, in a nod to the concerns of Tokyo and Seoul over their currencies’ recent sharp declines.

“It sends another strong signal to market participants that Japan and Korea are moving closer to stepping into the FX market, while at the same time officials from Japan and Korea will be hoping that the joint statement with the U.S. helps to strengthen the credibility of verbal intervention as well,” said MUFG strategist Lee Hardman.

The Japanese currency strengthened to 153.96 against the dollar on Thursday before paring gains. The dollar was last flat at 154.43 yen, within sight of Tuesday’s 34-year low of 154.79.

Market participants have raised the bar on possible intervention by Japanese authorities to prop up the yen, now pinpointing the 155 level from 152 previously, even if they believe Japan could step in at any time.

Still, given the dollar’s broad strength, Wei Liang Chang, a currency and credit strategist at DBS, said their models suggest the risk of intervention may even have shifted to the 156 range, as Japanese authorities consider the yen’s performance against a handful of other currencies that have depreciated.

The yen has lost some 8% in value against the dollar in 2024, but it has fallen against other currencies as well, to stand down nearly 5% against the euro and down almost 7% against the .

Japan last intervened in the currency market in late 2022, spending an estimated $60 billion to defend the yen.

EURO, STERLING EDGE UP

The euro held steady at $1.0676 after Wednesday’s 0.5% gain, pulling away from a five-month low touched on Tuesday. Sterling was last up 0.21% at $1.248.

The , which measures the U.S. currency against six others, was last down 0.11% at 105.84 but still within reach of this week’s 5-1/2-month high of 106.51 hit on Tuesday. The index is up 4.5% this year.

Markets are barely pricing in half a percentage point in cuts from the Fed this year, compared with an expectation for at least six quarter-point cuts at the start of the year.

Traders see September as the most likely starting point, versus June just a couple of weeks ago, based on the CME FedWatch Tool.

U.S. economic activity expanded slightly from late February through early April and firms signalled they expect inflation pressure to hold steady, a Federal Reserve survey showed on Wednesday.

Fed Governor Michelle Bowman said progress on slowing U.S. inflation may have stalled, and it remained an open question whether rates were high enough to ensure inflation returned to the Fed’s 2% target.

“In our view, it will take a run of lower CPI readings for the FOMC to cut interest rates in September,” said Kristina Clifton, senior economist at Commonwealth Bank of Australia (OTC:).

In cryptocurrencies, bitcoin rose 1.7% to $61,700 ahead of the widely anticipated halving event in the next few days.

On Thursday, UBS released a report presenting a less extreme valuation of the US dollar compared to simple Purchasing Power Parity (PPP) models.

The firm’s preferred valuation metrics indicate the dollar is approximately 2.5% overvalued against the Federal Reserve’s narrow Trade-Weighted Index (TWI) and about 5.5% overvalued in the Dollar Index (DXY). This contrasts with the 20-25% overvaluation suggested by PPP models.

UBS’s assessment suggests that the strong performance of the dollar may continue, as the case for an imminent return to what is considered fair value is not as compelling. The firm’s adjusted PPP estimate for has decreased to around 1.12, notably lower than the unadjusted Organisation for Economic Co-operation and Development (OECD) value of 1.50 and the pre-COVID model reading of 1.22.

The report notes that the euro has faced significant challenges, including a negative terms of trade (ToT) shock and underperformance in growth compared to the US. These factors have contributed to the lower valuation, with UBS suggesting that 1.12 could be a more realistic medium-term target for EUR/USD in scenarios where Europe’s economic conditions significantly improve.

Similarly, the Japanese yen’s valuation has been affected by ToT, although it has not faced as much of a growth headwind as the euro. The adjusted PPP for stands at approximately 122, which is above the PPP of around 95.0. This suggests that the yen is about 25% undervalued relative to the current spot rate. UBS points out that factors such as interest rate differentials, not accounted for in the model, likely explain much of this undervaluation.

UBS forecasts that the yen’s undervaluation against the dollar may persist in the near term, as a significant narrowing of the dollar’s yield advantage appears unlikely at present. This aligns with the bank’s updated foreign exchange forecasts, which imply that the current valuation disparities could continue for the time being.

InvestingPro Insights

Recent data from InvestingPro shows that the US dollar, as measured by the Dollar Index (DXY), has been experiencing fluctuations in its valuation over various time frames. The one-week price total return as of Day 109 in 2024 stands at a modest 0.58%, indicating a slight increase in the value of the dollar. Looking at a broader timeframe, the year-to-date (YTD) price total return shows a more significant increase of 4.45%, suggesting a stronger performance of the dollar since the beginning of the year.

Interestingly, the six-month price total return shows a minor decline of 0.63%, which could indicate some short-term pressures or corrections after previous gains. However, when expanding the view to a one-year horizon, the dollar’s resilience is evident with a total return of 4.07%. The price of the DXY at the previous close was 105.95 USD, reflecting the current strength of the dollar.

An InvestingPro Tip notes that traders should consider both short-term and long-term trends when assessing currency strength, as different time frames can reveal varying market sentiments and potential turning points. For those looking to delve deeper into currency analysis, InvestingPro offers an additional 15 tips that provide insights into trading strategies and market trends.

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