Asia FX: Resilience at risk as US yields climb – MUFG

MUFG’s Michael Wan observes that Asia FX and rates have maintained relative stability despite a substantial increase in US Treasury yields. However, he cautions that this resilience may not persist in the near term. He points out disparities between Asia FX and US yields, a lack of volatility in USD/CNH, and emphasizes that the rising US yields driven by tighter policy and higher risk premia are worrisome for Asia.

He highlights that Asian FX and rates markets have been quite stable so far, despite the rise in US Treasury yields. Across multiple measures, such as the divergence between Asia FX with yield spreads and absolute yields in the US, a general compression of Asia rates with US Treasury yields, and the strength and outperformance of certain currencies like KRW, TWD, and CNY, this resilience can be observed.

Furthermore, implied FX volatility in a pair like USD/CNH has reached multi-decade lows, indicating that the market may be positioned in a similar manner. Ultimately, it is not only the rising US yields but also the reasons behind their rise that matter for the spillover impact, including to Asia. Our previous analysis and framework indicate that market moves are increasingly driven by tighter policy and, importantly, higher risk premia, with some early signs of a risk-off sentiment, which is concerning.