Asian Currency Markets Face Bearish Sentiments Amid U.S. Interest Rates and Tariff Uncertainties

By Himanshi Akhand

Recent insights reveal a significant rise in bearish positions on various Asian currencies, corresponding to heightened expectations regarding U.S. interest rates and ongoing tariff threats. This trend has intensified amidst speculations that the U.S. Federal Reserve may be less inclined to cut rates as much as previously anticipated, leading to a stronger demand for the dollar.

The Chinese yuan, in particular, has witnessed a surge in short positions, reaching levels not seen since June 2023. Meanwhile, the Malaysian ringgit and the Indonesian rupiah have also seen a spike in bearish bets, marking a seven-month high based on the latest survey of 13 analysts.

Currently, the yuan is trading close to its lowest point against the dollar in 16 years. The currency is perceived as particularly vulnerable, given the potential for increased tariffs imposed by the incoming administration of U.S. President-elect Donald Trump. It should be noted that China is not only a major player on the global stage but also Southeast Asia's largest trading partner, which means that a weaker yuan could have ripple effects throughout regional currency markets.

As Trump's inauguration approaches on January 20, financial markets are exhibiting cautious behavior regarding Asian assets. Trump's proposed policies, which include tax cuts and tariff increases, are expected to contribute to rising prices, increasing bond yields, and strengthening the dollar.

Additionally, the Federal Reserve's current strategy intends to cut rates by only around 25 basis points in 2025, aligning market expectations accordingly, rather than the previously anticipated two cuts. This environment of potentially higher U.S. interest rates may encourage capital flight from emerging Asian markets, putting additional pressure on their currencies.

Analysts from DBS have pointed out that the external economic landscape may limit the capacity of Asian central banks to implement easing measures, especially in light of the ongoing challenges posed by substantial currency weakness since the onset of the Fed's rate-reduction cycle.

Furthermore, short selling on the Taiwan dollar has now reached its highest levels since May 2024, reflecting growing pessimism about the currency's performance. Similarly, the Indian rupee is experiencing bearish sentiments, marking its ninth consecutive weekly decline, resulting in the highest short positions recorded since July 2022. The Singapore dollar is also seeing increased short positions, the highest since October 2022. Analysts from Citi express concerns around Singapore's susceptibility to indirect impacts from a slowdown in global growth, despite the lack of direct exposure from U.S. tariffs.

The situation is particularly acute for the South Korean won, identified as the most shorted currency in Asia. This comes on the back of the sharpest annual decline for the won in 16 years, driven by the government's attempts to stimulate the market overshadowed by export slowdowns and domestic political instability.

The findings presented here are derived from a recent survey, which sought to gauge market positions in nine emerging Asian currencies, including the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit, and Thai baht.

The poll measures net long or short positions on a scale ranging from minus 3 to plus 3, where a score of plus 3 indicates a strong preference for holding U.S. dollars.

The report details positions held through non-deliverable forwards (NDFs), highlighting the shifting landscape of currency dynamics amid ongoing geopolitical and economic changes.

Summary of Currency Positioning

The current market positions reflect the following:

DATE: 09-Jan-25: 1.65, 1.75, 1.34, 1.20, 1.18, 1.69, 0.99, 0.65, 0.76

DATE: 12-Dec-24: 1.15, 1.86, 0.83, 0.87, 0.82, 1.43, 0.65, 0.53, 0.26

DATE: 28-Nov-24: 1.32, 1.45, 1.12, 1.03, 1.10, 1.13, 0.76, 1.13, 0.66

DATE: 14-Nov-24: 1.14, 1.61, 0.80, 0.81, 1.07, 0.87, 0.65, 1.18, 0.90

DATE: 31-Oct-24: 0.30, 1.06, -0.03, 0.59, 0.60, 0.82, 0.11, 0.81, 0.09

DATE: 17-Oct-24: -0.43, 0.26, -0.44, 0.04, 0.24, 0.67, -0.40, 0.26, -0.28

DATE: 03-Oct-24: -1.14, -0.79, -1.26, -1.08, -0.59, -0.04, -1.18, -0.70, -1.45

DATE: 19-Sep-24: -0.67, -0.90, -1.12, -1.18, -0.66, 0.33, -1.30, -1.10, -1.33

DATE: 05-Sep-24: -0.85, -1.09, -1.26, -1.05, -0.77, 0.21, -1.46, -1.00, -1.22

DATE: 22-Aug-24: -0.62, -0.93, -1.08, -1.26, -0.70, 0.21, -1.57, -1.03, -1.16

Asian, currency, markets