TD Securities: Asia Central Banks' Déjà Vu Moment

TD Securities write “Asia Central Banks (CBs) are back in the fray to defend their currencies as the ADXY approaches the lows seen last year. KRW, CNY & THB have been the standout underperformers YTD and it isn't surprising that BoK, BoT and PBoC have stepped up their verbal intervention game with others such as BI & CBC also sounding the alarm.”

• “By our estimates, Asia CBs have the firepower, with US$5.6tn in FX reserves, similar to levels before they took action in Oct last year. If push comes to shove, Asia CBs may also sell their U.S. Treasury holdings to replenish their USD to support their FX intervention efforts.”
• “However, that’s not our base case as CBs are aware this could be counterproductive with a further sell-off in U.S. rates just adding to USD strength.”
• “Asia is in a relatively strong position to guard against any systemic financial fallout judging by reserve adequacy measures such as import coverage ratios and IMF's Adequacy Reserve Ratios metric.”
• “Across both measures, most countries have sufficient reserves to guard against FX pressures but KRW, IDR & MYR appear less secure.”
• “The low carry and declining macro picture also puts THB & KRW as ideal funders against high yielders and the high beta nature of these pairs suggest that we can expect bigger losses if USD strength continues.”