Asia Currency Options Least Bearish in Year on Yuan Risk
Options traders are the least bearish on Asian currencies versus the dollar in a year as confidence builds that China will avoid a so-called hard landing, helping lure funds as Europe’s debt crisis deepens.
The premium charged for the right to sell China’s yuan in a month over contracts to buy the currency, known as the risk-reversal rate, was 15 basis points as of 2:14 p.m. in Shanghai, down from 64 basis points at the end of last year, according to data compiled by Bloomberg. Among 22 emerging-market currencies, nine of the 10 lowest rates are in Asia with an average premium of 71 basis points on May 2, the lowest since April 2011. Traders pay 375 basis points extra for the right to sell Brazil’s real, the biggest premium among developing nations.
The more positive outlook for emerging Asia, whose 10 biggest economies hold half of the world’s $10 trillion in currency reserves, reflects healthy government finances that make the region a preferred investment destination, according to Standard Chartered Plc. The ratio of public debt to gross domestic product in China is 44 percent and that in Thailand, whose currency is the second-least bearish based on the risk-reversal rate, is 41 percent. Brazil’s ratio is 54 percent.
“Asian nations continue to flourish, resulting in above-average growth,” Douglas Borthwick, the head of foreign-exchange trading at Faros Trading LLC in Stamford, Connecticut, said in a May 4 interview. “Asian emerging-market currencies continue to be attractive for investors.”
Chiang Mai Initiative
Japan, China, South Korea and 10 Southeast Asian nations agreed on May 3 to boost the so-called Chiang Mai Initiative Multilateralization agreement, which involves a pool of foreign-currency reserves, to $240 billion from $120 billion.
Borthwick said out-of-the-money dollar put options “seem good value given Asian currency strength appears inevitable, especially given the update in the Chiang Mai Initiative.” The contracts give the right, but not the obligation, to sell the dollar at a strike price below the current market rate.
The risk reversal for the baht, the smallest after the yuan, narrowed 14 basis points this year to 61 basis points, and the rate for Taiwan’s dollar fell 17 basis points, or 0.17 percentage point, to 69 basis points. The rate for the Philippine peso slumped to 97 basis points from 150 basis points.
Developing Asian economies grew 7.8 percent in 2011, compared with 5.3 percent for central and eastern Europe and 4.5 percent for Latin America, according to the International Monetary Fund. The average cost of insuring emerging Asia’s sovereign debt for five years using credit-default swaps fell 34 basis points this year to 158 yesterday. That compares with 310 basis points for Latin America and 373 for emerging Europe.
Strong economic growth and improving credit ratings make emerging Asia the best currency bet globally, according to Daniel Janis, a global fixed-income portfolio manager at Manulife Asset Management in Boston. Moody’s Investors Service raised Indonesia to investment grade this year, while Greece, Spain, Italy and Portugal were all downgraded.
“We like Asia ex-Japan first,” Janis, who directly oversees some $11.2 billion, said in an interview yesterday in Singapore. “If we‘re going to have a position versus the U.S. dollar, we would want to have the Asia currencies unhedged.”
Asian currencies slid to the lowest level since January yesterday as Greek politicians struggled to form a new government, adding to concern Europe’s debt crisis will slow global growth.
Malaysian exports contracted 0.1 percent in March from a year earlier, official data showed yesterday, compared with a median forecast of economists in a Bloomberg News survey for a 3 percent gain. China announced today exports increased 4.9 percent in April from a year earlier, less than the median forecast in a Bloomberg survey for an 8.5 percent increase and an 8.9 percent gain the previous month.
“We will likely see greater headwinds from the negative impact of elections in Europe and that could cast negative sentiment over Asian currencies,” said Yeah Kim Leng, chief economist at RAM Holdings Bhd. in Kuala Lumpur.
Asian economies are stabilizing. China’s manufacturing expanded for a fifth month in April while its foreign-exchange reserves climbed 3.9 percent in the first quarter of 2012 to $3.3 trillion, official data show. Consumer-price gains slowed to 3.4 percent last month from 3.6 percent in March, according to the median estimate of economists in a Bloomberg survey before data tomorrow. That would be the third straight month that inflation has been within the government’s 4 percent target, making it easier for policy makers to focus on growth in the world’s second-largest economy.
Gross domestic product in China increased 8.1 percent from a year earlier in the first quarter, the least since mid-2009, and signs of stabilization have led to a reduction in bets that the dollar will appreciate, said Callum Henderson, global head of foreign-exchange research in Singapore at Standard Chartered.
“Asian countries typically run external surpluses and these should fundamentally lead to more favorable risk reversals for their currencies,” said Henderson. He sees the “best medium-term value” in the Taiwan dollar and South Korea’s won, adding that he also likes the Philippine peso.
Asian currencies typically have lower volatility, a measure of foreign-exchange swings used to price options, as the region’s accumulated currency reserves allow policy makers to guard against extreme movements in their currencies.
Among emerging markets, eight currencies with the 10 lowest volatilities are in Asia, led by China at 1.85 percent, Taiwan at 4.3 percent and Thailand at 4.51 percent. Implied volatility on one-month options for the Hungarian forint was the highest at 15.7 percent, followed by South Africa’s rand at 14.6 percent.
Soft Risk Appetite
“In periods of soft global risk appetite, Asian currencies typically tend to outperform slightly,” Olivier Desbarres, the head of foreign-exchange strategy for Asia-Pacific ex-Japan at Barclays Capital in Singapore, said in an interview on May 8. “They are expected to be more stable due to overall stronger macro fundamentals and importantly, the prospect of central bank intervention to support the currencies should they come under more acute pressure.”
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