Trade war hits Asian FX

By Morgan Davis

Big global banks still dominate FX trading in Asia, according to the latest results from the annual survey of the industry carried out by Asiamoney’s sister publication Euromoney.

JPMorgan beats Bank of America Merrill Lynch to the overall top spot in Asia, with UBS, Citi and Deutsche rounding out the top five. At a country level, Malaysia’s CIMB is the only local bank to top the overall ranking in its domestic market. In all other markets the hegemony of the international bank persists.

Whether you’re a big global player or a local trading shop, you face the same problem today: markets are in flux. It’s not just commodities, bonds and stocks responding to cuts in interest rates but currencies too.

“There are lots of idiosyncratic stories going on in [Asia] that make it a very exciting time to be trading FX,” says Geoff Kot, global head of FX trading at Standard Chartered.

The latest phase of the trade war began in the first week of August with a tweet from US president Donald Trump threatening additional tariffs on $300 billion of Chinese goods. This created volatility in the market and with it an increase in client activity, as well as responses from other countries and central banks.

India, Indonesia, the Philippines and Thailand cut interest rates in August in response either to slowing growth or the expectation of a slowdown.

“The reaction functions of various major central banks around the world are very fascinating,” says Kot. “I expect that to continue to be the theme for the coming quarter.”

For investors in the Asia FX market, that means making new risk management assumptions and keeping an eye on market movements.

“It’s quite a technical environment that we’re operating in at the moment,” says Tony Shaw, head of institutional and wealth sales for global markets at HSBC Asia Pacific.

He cautions that investors need to differentiate between headline news and actual risks. While the moving market creates an environment for reactionary trading, now is the time to be strategic, he says.

“The discussions have morphed from ‘what’s going on?’ to a far more cerebral dialogue about risk management.”

Chu Kok Wei, group head of treasury and markets at CIMB, agrees that more attention is being paid to underlying policies and market changes that may have long-term effects, rather than the market’s quick reactions to Trump’s tweets.

“People are either slowly getting used to it, or the right word is getting tired and lethargic of it,” he says. “Over time, people will probably pay less attention to headline reactions.”

On August 5, just days after Trump’s tariff threats, the renminbi weakened, falling through the symbolic rate of seven to the dollar, shocking investors.

“It’s quite clear, in both action and communication, that this was driven by the escalation of tariffs,” says Adarsh Sinha, Bank of America’s co-head of Asia rates and FX strategy. “We have gone through seven [renminbi to the dollar]. There’s no longer a line in the sand.”

The move, says Sinha, was a surprise, particularly after US treasury secretary Steven Mnuchin’s visit to Shanghai at the end of July.

“It was clear that as long as there was some hope and scope for resolution… that [China] would try and prevent a depreciation of the renminbi,” says Sinha. “But the additional tariff announcement by Trump showed that there had been a loss of good faith.”

He makes the point that China “stopped manipulating the currency,” and adds that “they were manipulating it to keep it below seven.”

Following the renminbi’s fall, the US-China trade row seemed to escalate further when the US Treasury Department almost immediately designated China as a ‘currency manipulator’. But the label itself carries little meaning at this point, bankers agree. Generally, labelling a country a currency manipulator would be followed by negotiations, the possibility of tariffs and related trade threats – things that came before the label was used.

“It’s not particularly relevant,” says Sinha, calling the label merely symbolic. “The currency manipulator tag doesn’t really matter.”

But the willingness of the US to bandy about the term like a weapon should raise a few eyebrows.

The US has three factors – a global current account surplus, a large bilateral trade surplus and persistent one-way intervention in foreign exchange markets – for identifying currency manipulation by its trading partners. Notably, China did not check all of the boxes of these criteria.

“It shows that the US can, of course, label someone a manipulator,” says Kot. “But it also shows that they don’t have to meet all three published criteria for the Treasury to label someone a currency manipulator.”

“It is probably more of a negotiation technique by the US,” says Henry Quek, Asia Pacific head of FX sales, trading and research at State Street Global Markets. “The question is whether the US is going to use this technique as a negotiation strategy with other currencies as well.”