(Bloomberg) -- Options traders are positioning for gains in Southeast Asian currencies as the Federal Reserve’s anticipated rate cuts along with strength in the yen and yuan boost optimism in the region.
A Bloomberg gauge of Southeast Asia’s average one-month risk reversals has risen to the highest in nearly five months. It signals that the premium to hedge or to speculate on Southeast Asian currency upside over that period is rising as more investors position for gains.
“The demand for more protection against dollar weakness amid speculation of Federal Reserve rate cuts this year is also driving up the demand for Southeast Asia’s risk reversals,” according to Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence in Hong Kong.
Chiu says dollar/Southeast Asia risk reversals can fall further — which would mean gains for the Bloomberg gauge — as the Fed’s first rate cut is likely in September, although US elections could cause a rebound.
While market convention is to cite dollar/Southeast Asia risk reversals, the gauge is the inverse of the average of one-month risk reversals for Thailand, Indonesia, Singapore, Malaysia and the Philippines.
The yen rose over 7% versus the dollar in July as anticipation built that the Bank of Japan will hike interest rates, which was delivered Wednesday. The onshore yuan snapped a six-month losing streak over the same period, with the 120-day correlation between the Chinese and Japanese currencies close to a record high.
These moves matter for Southeast Asian nations as China is their main trading partner and the simultaneous advances in the yen and yuan weigh on the dollar. However, risk reversals of currencies from smaller economies can also be impacted by large hedging flows, not necessarily market sentiment, said Alvin Tan, head of Asia FX strategy at RBC markets.
The one-month dollar-offshore yuan risk reversal fell to minus 1.05 this week, the most negative on record in data going back to 2011.
“CNY sentiment has now become far less bearish and in fact has seen one of the biggest shifts in risk reversal skews among EM currencies recently,” Barclays Bank Plc strategists including Mitul Kotecha and Lemon Zhang wrote in a note on Friday.
Southeast Asian currencies are are already starting to appreciate. The Indonesian rupiah, Malaysian ringgit and Thai baht posted their biggest monthly gains this year in July.
--With assistance from Masaki Kondo.
©2024 Bloomberg L.P.
