Cornered FX traders brace for dollar to smash more Asia records

INVESTORS are re-writing playbooks on how to trade Asia’s hallmark currencies as the dollar’s rampage pummels peers to fresh lows.

With the greenback supercharged by expectations of higher-for-longer US interest rates, traders are struggling to pick the bottom for Asian currencies.

In the last 24 hours, the yen fell to within a whisker of 145 per dollar while China’s yuan is teetering on the edge of the key 7 level. The risk-sensitive Korean won is hurtling towards the closely-watched 1400 mark, with jawboning from officials on Wednesday (Sep 7) having little impact.

“It’s difficult to call a turning point and the default is to not fight dollar strength,” said Viraj Patel, a strategist at Vanda Research in London. While there’s an opportunity to start buying beaten-down peers like the yen, “the path of least resistance is that these hawkish Fed trades - dollar strength being one of them - continues until something stops it”.

Here’s a snapshot of what’s next for some of Asia’s most-traded currencies:

Yen slide

For the battered yen, now on track for its worst year on record, investors are mulling the strongest warnings to date from senior Japanese government officials aimed at stemming its slide. Dollar-yen touched 144.99 Wednesday before pulling back, making 145 a key focal point for chart watchers. It traded around the 144 level early Thursday.

And traders old enough to remember are keeping an eye on 146.78, the level reached before a joint Japan-US intervention to support the currency in 1998. The US Treasury Department on Wednesday stuck by its reluctance to support any potential intervention in currency markets.

Yuan at 7

China’s currency is sliding away from the 6 handle, even after Beijing sent its most powerful signal yet on its discomfort with the yuan’s weakness. The offshore yuan was little changed around 6.9670 in early Asia trading on Thursday.

Under pressure from continued Covid-induced lockdowns and the embattled property sector, investors are selling the yuan as they see little revival in growth and as interest rates in the US rise at the fastest clip in a generation. Goldman Sachs Group, UBS Group and Bank of America are all forecasting the yuan will weaken to 7 as China’s economic slowdown bites.

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Standard Chartered Bank doesn’t expect authorities to directly intervene in markets to strengthen the yuan, though they may “step-up” on other measures including boosting issuance sizes of offshore PBOC bills in an attempt to bolster the currency, said Becky Liu, head of China macro strategy.

Risky won

South Korea’s currency, seen as a bellwether for risk sentiment in Asia, is fast approaching the psychological 1400 level versus the dollar last seen in 2009.

Its precipitous fall prompted the central bank to warn against the pace of the currency’s decline following its slump to a 13-year low on Wednesday. Yet that’s done little to ease traders’ bearishness. Dollar-won traded around the 1380 level Thursday.

Expect more jawboning from authorities, according to TD Securities. “We may expect more FX intervention in the days ahead as the authorities are unlikely willing to see dollar-won break above the 1400 level ahead of the Chuseok holidays,” TD strategists wrote in a note. BLOOMBERG