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Key market highlights across September 2022
Volatility picked up globally over September as the Federal Reserve tightened aggressively as US inflation remained high. The peak for Fed funds rates has moved from 3.9% in August to 4.5% in September. The US dollar appreciated further, up 3.1%, hitting a 20 year high on a nominal basis and a 40 year high on a real effective basis, putting downward pressure on EM and G10 currencies.
The UK gilts and British pound experienced excessive moves that prompted intervention by the Bank of England. This dislocation was a reminder that even in developed bond markets, excessively leveraged exposures can be destabilising.
The US Federal Reserve rate hike and the strong US dollar hurt Asian local bond markets. September monthly returns were negative -5.2% in US dollar terms. Since January, the Asian local bond index has returned negative 13.9% in US dollar terms. It is the worst performance since the inception of the index in 2012, although not nearly as poor as the global aggregate index which saw losses of close to 20%.
*For illustrative purposes only and does not constitute to any recommendations to invest in the above-mentioned.
How have Asian currencies been holding up?
Since January, Asian currencies have exhibited more resilience as compared to G7 currencies. The Japanese Yen depreciated by about -20%, the Euro by approximately -14%, while the JPMorgan Asia Dollar Index was down by only -9.9%. With RMB the largest constituent in the Asian dollar index at about 40%, it is logical that the Asian dollar index has outperformed reflecting a steady RMB versus the US dollar.
*For illustrative purposes only and does not constitute to any recommendations to invest in the above-mentioned.
Starting in April 2022, the RMB also began to depreciate following the US dollar strength, with a move in September above the market conceived magical 7.0 level against the US dollar. Interestingly the RMB measure against its trade weight basket shows an unchanged value compared to the fourth quarter 2021, validating that the RMB depreciation is more a reflection of US dollar strength rather than underlying weakness in China’s economic fundamentals.
Many Asian central banks have begun direct intervention to smoothen the currency depreciation. Asian markets are fundamentally solid across a number of measures: lower CPI relative to Developed market inflation, higher real rates, positive GDP, steady accumulation of international reserves, favorable current account balances, and manageable fiscal deficits. Their central banks have the tools to effectively manage their economies and support their currencies.
*For illustrative purposes only and does not constitute to any recommendations to invest in the above-mentioned.
Navigating a strong US$ in the Asia Fixed Income market
Looking ahead, we believe that the US dollar will likely remain strong in the near term, barring clear signs of US core inflation peaking, allowing for the US Federal Reserve to pivot. Key guideposts are inflation measures: wages in US labor report, US Consumer Price Index, both headline and core.
With regional currency and rates volatility likely to remain elevated, instead of taking directional bets against the US dollar or the US Federal Reserve, we will continue to rely on relative value opportunities to add alpha, for example, overweight duration in China versus Philippines and India, long Singapore dollars and Korean won while short Indian rupee and Taiwan dollars.
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