Trump Tariff Concerns Weigh on Yuan, Asian Currencies

Investors have ramped up short bets on Asian currencies on growing concerns that US President-elect Donald Trump’s economic policies will erode the appeal of risk-sensitive emerging market assets.

Short bets emerged on the Singapore dollar for the first time in four months and were at their highest late June, while those on the South Korean won and the Taiwan dollar scaled six-month highs, a Reuters poll of 10 respondents showed on Thursday.

Trump’s resounding victory in the US presidential elections last week sent shock waves across the emerging markets since his policies of imposing tariffs on Chinese imports are seen fanning inflation which could mean a shallower-than-expected easing cycle in the United States.

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The dollar has surged to a one-year high in a matter of days, pressuring the regional assets.

The Malaysian ringgit and the Thai baht have lost around 4% since the outcome of US elections became clear last week. Their trade-reliant economies, particularly with China, make them vulnerable to tariff-related headwinds.

“Despite robust domestic fundamentals in strong growth and falling inflation, Asia FX will have to navigate the dual challenge of higher US interest rates and likely higher tariffs by the US in 2025, resulting in a stronger USD,” analysts at ING said.

“Asian currencies with a higher sensitivity to CNY and larger trade surpluses with the US would face the highest depreciation pressure.”

Korean won, Singapore dollar ‘vulnerable’

ING analysts said South Korean won stands out on both those counts, and forecast the unit remaining weak throughout next year.

Respondents to the poll had the most unfavourable view of the won, with short bets soaring to their highest since early May.

Bearish bets on the Chinese yuan were at their highest since late June, with analysts expecting Southeast Asia’s largest trading partner to be impacted by sweeping US tariffs.

Chang Wei Liang, FX & credit strategist at DBS, struck a slightly optimistic tone, saying yuan might not emerge as the top loser if tariffs are implemented with the impact manageable at under 1% of its $18 trillion economy.

Views on Singapore dollar turned over the fortnight as its trade-reliant economy faces uncertainty originating from potential global trade headwinds.

“Should tariffs materialise, their impact on ultra-open Singapore is likely to be significant,” Brian Tan, senior regional economist at Barclays, said.

Tan expects the Monetary Authority of Singapore to ease its exchange rate-based monetary policy next year.

Elsewhere, short bets ratcheted up on the Taiwan dollar, Indian rupee, Philippine peso, and the Indonesian rupiah.

The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.

PBOC ‘will wait for tariffs, then respond’

Meanwhile, BNP Paribas analysts Ju Wang and Ann Jiang said in a note today: “Before US-China trade tensions became headline news in Donald Trump’s first term as US president, China’s share of total US imports had surpassed 21%. It has since declined to 13.9% as of 2023.

“Currently, the US imposes an average tariff of 14% (with tariff waivers) on Chinese imports. If the tariff were to increase to 60% as proposed during Trump’s election campaign, we estimate that the fair value of the USD-RMB would rise to 7.7 based on the multilateral exchange rate adjustment model, assuming an initial exchange rate of 7.25.

“Additionally, if China were to retaliate with tariffs on US imports, we predict the fair value of the exchange rate would be 7.5,” they said.

“Currently, the market seems to have set an expectation for the initial 10-15% tranche of tariffs to arrive 3-6 months after Trump’s inauguration … fair value of USD-RMB could be around 7.35-7.40 under this scenario (starting from 7.25).

“We think the People’s Bank of China is likely to allow the USD-RMB to move higher as tariffs are imposed, similar to its reaction in 2018-19. Back then, the pair moved in line with its fair value under a bilateral exchange-rate-adjustment model.

“We think the PBoC will avoid pre-emptively devaluing the currency and is only likely to allow the USD-CNY fixing to move significantly higher when the tariff becomes official, in an effort to avoid the move being viewed as the trigger for a currency war.

“In this scenario, the PBoC would be unlikely to allow [the] spot [rate] to break the high-end of the range over the past years before the tariff actually arrives, in our view.”