(Bloomberg) -- Asian currency traders have barely recovered from Wednesday’s selloff but they’re already hunkering down for the next macro risks on the horizon.
Trading desks across the region are bracing for the possibility of more losses when the Federal Reserve unveils its policy decision on Thursday and China’s lawmakers wrap up a meeting Friday. If the US central bank signals it’ll go slow on interest-rate cuts or Beijing’s announcement underwhelms investors, Asian currencies are likely to come under pressure.
Foreign-exchange stability in Asia has once again become a talking point after Donald Trump’s presidential victory triggered a selloff which drove the yen toward the psychological level of 155 per dollar and the onshore yuan nearer a 16-year low. Some strategists are even warning that a new round of US tariffs on its trade partners may spark a race to devalue the region’s currencies.
“There’s just no rest for Asian currency traders this week,” said Shoki Omori, chief desk strategist at Mizuho Securities. “Trump’s win already ramped up dollar strength and now investors will have to be on guard for potential intervention risks if the Fed or China’s National People’s Congress surprises.”
First up is the Fed meeting, where traders will parse policymakers’ remarks to gauge the pace of future interest-rate cuts. The central bank is expected to lower the benchmark rate on Thursday by a quarter percentage point and the median estimate released in September showed they expect one more quarter-point cut this year and an additional full point of reductions in 2025.
Any surprise on this front is likely to roil the dollar, and by extension, regional currencies and may prompt authorities to intervene again. The Bloomberg Dollar Spot Index fell on Thursday after notching its biggest daily gain in over two years in the previous session. Australia and New Zealand’s currencies rose as much as 1% in early London trading Thursday.
South Korea has said it would carry out contingency plans in case market volatility increases excessively. There were also signs that India’s central bank had stepped in to support the rupee, while Bank Indonesia said on Wednesday it was ready to smooth out market swings.
The People’s Bank of China set the yuan’s daily reference rate at the weakest level in nearly a year on Thursday, but there’s still a sense that authorities are unlikely to tolerate a sharp drop in the currency.
“We expect the PBOC will once again ramp up intervention to prevent excessive depreciation,” said Lynn Song, chief Greater China economist at ING Bank NV.
Trump’s victory catapulted the dollar to a one-year high as investors reignited so-called “Trump Trades” that include a stronger greenback — a move that pushed currencies including the Mexican peso and the South Korean won to multi-year lows.
After clearing the Fed hurdle, traders will have to contend with China. The Standing Committee of the National People’s Congress, the executive body of the nation’s top legislature, is expected to deliver more stimulus after this week’s meeting.
Beijing has rolled out a series of measures — including a policy blitz in late September — to shore up its economy but analysts say authorities need to spur consumption to revive growth. If policymakers fail to live up to expectations on Friday, the yuan may weaken again as traders factor in the hit from another round of US tariffs.
Devaluation Risks
Some analysts warn of a more dire consequence if Trump’s return to the White House continues to boost the dollar: a currency war may break out in Asia as authorities race to preserve the competitiveness of their exports.
Should the risk of US tariffs increase, short sellers may target the yuan given that China is squarely in Trump’s crosshairs. And the risks extend to other parts of Asia as the South Korean won has marched past the key level of 1,400 per dollar while Indonesia’s rupiah and Philippine peso have tumbled to multi-month lows.
“They almost have no choice,” Brad Bechtel, global head of FX at Jefferies LLC, wrote in a note, referring to China. “They will devalue the currency in reaction to any tariffs from Trump with the magnitude of devaluation matching their perception of the economic impact to them.”
--With assistance from Hooyeon Kim and Mia Glass.
(Updates story with latest prices in Aussie and the kiwi.)
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