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

ASIA FX

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

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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

Keep reading...Show less