Bloomberg Market Specialists Wendy Tan and Ardha V K contributed to this article. The original version appeared first on the Bloomberg Terminal.
Background
Growing depreciation pressure on the yuan is clouding the outlook for Asian currencies as the delta variant wreaks regional havoc.
China’s sovereign bond yield premium over U.S. Treasuries has shrunk 75 basis points in the past eight months, reducing support for the yuan. Slowing manufacturing activity and rising virus cases are sending Chinese swap rates lower, reinforcing speculation Asian central banks will delay rate hikes as growth concerns reemerge.
“Emerging markets face more pressure from Covid, and more uncertainty around new variants, given lower vaccination rates,” Andrew Sheets, chief cross-asset strategist with Morgan Stanley, told Bloomberg News.
The issue
China’s two-year sovereign bond yield has accelerated its slide over the past month. Its yield premium over Treasuries narrowed to as low as 220.8 basis points at the end of July, having peaked at 296 basis points in late November. The slide in sovereign yields comes as bets swell in the derivatives market that the People’s Bank of China may ease monetary policy in the coming months.
Use the Historic Spread function to compare the spreads between two bond indexes.
Philippines, South Korea and New Zealand are among the prime candidates for benchmark rate increases by central banks. Yet, the momentum has stalled for India and China rate increases. Malaysia and Thailand are near or at neutral levels for now, while Taiwan sees expectations for a rate cut growing.
Hopes for rate hikes may fade should concerns over slowing growth intensify, knocking the wind out of regional currencies. The International Monetary Fund recently lowered 2021’s growth prospects for developing economies, particularly in emerging Asia, while raising those for advanced economies.
The divergence among countries is deepening, driven by differences in vaccine availability and new cases.
Many Asian countries, including South Korea, Thailand and Malaysia, are seeing record numbers of new cases, delaying economic reopenings. However, a decline in cases is seen in Indonesia, a pattern also experienced in India. The delta variant broke through China’s virus defenses, reaching nearly half of the mainland’s 32 provinces in just two weeks.
Signs of trader angst have begun to emerge in the options market as cratering Chinese equities affected sentiment. USDCNY options trading was 135% of the five-day average on July 29 and was higher than dollar-yen for the first time in three months, Depository Trust & Clearing Corp. data show.
Bloomberg’s functionality can monitor the headwinds for Asian currencies.
Tracking
To see how volume has surged in the yuan options market, use the Swap Data Repositories Volumes function.
Type “derivatives volumes” and select SDRV – SDR Derivatives Volumes.
For more information on this or other functionality on the Bloomberg Professional Service, click here to request a demo with a Bloomberg sales representative. Existing clients can press <HELP HELP> on their Bloomberg keyboard.