Risk Reversals Move Higher, But Not Beyond U.S./China Trade-War Levels

A quick look at the wider USD/Asia risk reversal space in recent months reveals that upside hedging demand has dominated when it comes to the major USD/Asia crosses. Our 3-, 6- & 12-month ADXY-weighted risk reversal measures have pushed higher during ’22, which is understandable given the spot market moves (the BBG-J.P.Morgan ADXY currently sits at the lowest level observed since July ’20) and wider fundamental dynamics observed at present.

• Those moves come against the wider backdrop of USD strength, while the recent run weaker in the Chinese yuan has drawn most of the focus from a USD/Asia perspective.
• Even though risk reversals are elevated on a short-term horizon, we note that the 3 measures that we monitor operate well shy of their respective COVID outbreak peaks and haven’t really been able to push through their U.S.-China trade war highs.
• Nonetheless, regional authorities will be on the lookout for excessive one-way market positioning targeting further currency weakness, with the well-documented global inflationary pressures adding further focus on this front.
• Some notable regional intervention headline flow observed in recent days includes: the RBI seemingly stepping in to intervene against further INR weakness (after USD/INR touched a fresh record high earlier this week); Bank Indonesia reiterating that it will stabilise the IDR if necessary; Korean officials remaining wary of the potential need to stabilise markets/KRW; the PBoC deploying a modest bias against further CNY weakness via its USD/CNY mid-point fixing over the last 7 days, as well as touted state-owned bank activity in the FX forwards space.
• We also reiterate that all of the notable USD/Asia FX pairs are comfortably above their respective 200-DMAs.

Fig. 1: ADXY-Weighted 3- 6- & 12-Month Risk Reversals

Source: MNI - Market News/Bloomberg