A recent upswing in emerging-market risk sentiment has benefited a number of Asian currencies. According to BNP Paribas’ early warning signals methodology, the Malaysian ringgit is now in the lowest risk category, while the Indonesian rupiah has also been upgraded.
Carry trades have been popular as volatility has subsided in recent months on a flurry of positive signals: hopes that the US Federal reserve is nearing the end of the tightening cycle; a resilient global economy; the lifting of the US debt ceiling; and easing stress in the banking and financial sector.
“Currencies with still-low interest rates – like the Japanese yen – have suffered as a result,” explains Manish Jaradi, strategist at IG Group. “For instance, the MXN/JPY cross was up nearly 30% this year, before retreating recently.”
Up until the July carry unwind, higher yielding currencies in the region had generally done better this year. Lower-yielding currencies need positive idiosyncratic stories about growth and inflows to overcome the negative yield differentials and renminbi correlation.
Joey Chew, head of Asia FX research at HSBC, points to the example of the Korean won, which "has been able to outperform recently because of optimism about the memory-chip cycle turning and corporates’ profit repatriation following tax changes.
“We
