Asian currencies resilient against higher US yields, says Fitch

The exchange rates of Asia-Pacific's largest economies proved resilient against the dollar throughout the coronavirus pandemic crisis and the recent rise in US bond yields and should make further gains in the coming months, says Fitch Ratings in a new report.

The region's currencies have been supported by China's strong economic recovery, particularly the Australian dollar and Korean won, while high commodity prices have provided tailwinds for the Australian dollar and Indonesian rupiah. Lower external imbalances in Indonesia and India have better supported the countries' currencies during the recent episode of market volatility relative to the sell-off in 2013.

Fitch’s empirical analysis – based on estimating ‘fair value’ models for six major Asian currencies against the dollar – also shows that, historically, most Asian currencies have been more sensitive to US short-term interest rates rather that longer-term US bond yields. The rupiah stands out as being the most sensitive to rising US long-term bond yields.

With the Fed likely to keep the short-end of the US yield curve firmly entrenched at its current low level, it thinks that most Asian currencies have scope for small gains in coming months, having already regained some ground in recent weeks, following the February-March sell off.

Downside risks to its currency forecasts include much higher US inflation pressure than it expects, prompting a faster-than-anticipated rise in US yields and a strong broad-based dollar appreciation trend.

Fitch projects exchange rates each quarter for 20 large economies, which are published in its Global Economic Outlook. This report aims at a better understanding of exchange-rate drivers and to inform of its forecasts. Exchange-rate forecasts feed into our broad macro and ratings analysis.