Rebound In US Yields Could Undermine Recent SEA/INR FX Outperformance

While the near term focus remains on US-China geopolitical tensions and China military exercises around Taiwan, the overnight bounce in US yields has the potential to undermine the recent outperformance in South East Asia (SEA) and INR FX.

• The chart below updates a recent one we produced of the J.P. Morgan Asian currency index (ADXY) against the real US 10yr yield (which is inverted on the chart). From July 20th to the start of the month we saw a sharp drop in the US real yield from +60bps to +9bps, although this was reversed somewhat overnight (back to +27bps).
• The ADXY didn't rally much with this move lower in real yields, as the index is heavily weighted to CNY, which has arguably been driven more by geopolitics in recent weeks.

Fig 1: ADXY & US Real 10yr Yield

Source: MNI/Market News/Bloomberg

• The benefit was clearer for other Asian FX though, particularly in SEA/INR. The second chart below plots spot returns since that most recent peak in the real 10yr yield (July 20^th).
• Stronger gains were seen in economies typically more sensitive to shifts in Fed policy, although this wasn't uniform, whilst TWD underperformance over this period is likely tied to Pelosi's visit.
• Still, gains have slowed in the likes of THB, PHP, IDR and INR today, with higher US yields no doubt a factor. Relative performance trends in Asian FX is something to be mindful of amidst on-going shifts in the US outlook.
• Fig 2: Asian FX Returns Since Recent Peak In US Real Yield (July 20th)

Source: MNI/ Market News/Bloomberg