Asian Currencies fall on strong Treasury yields
The yen’s safe haven status has gotten quite a boost thanks to China’s credit crunch. China has been releasing weak economic numbers as of late, and now showing even bigger problems. This is forcing regional investors to look for safe havens like the yen.
Yesterday saw a rout in market shares, in mainland China, as investors reacted to China scrambling to reign in interbank rates which could cause a potential money market squeeze. Markets, in China are now at lows not seen since 2009. This also caused other markets, like the Nikkei to erase earlier gains.
However, there is a bigger concern that investors should worry about, especially in the South Pac Rim. Let us look at the benchmark U.S. Treasury yields as they approach 3 percent. Should the 10 year note hit 3 percent, then we could see disaster for the region. It could shift a lot of capital out of the region hastening liquidity movements. Yesterday the yields did creep back a little from a two year high at 2.66 percent, as seen in the chart below. This helped to reign in the dollar’s ascent, which had hit a three week high in the previous session.
For now, we can thank some “jaw boning” done by Minneapolis Fed President Narayana Kocherlakota who reassured investors regarding the imminent tapering down of the QE2 program. He said markets “were wrong” to consider the Fed becoming more hawkish. Dallas Fed head Richard Fisher, further calmed investors by stating the Fed will continue to maintain an accommodative policy even as it reduced the stimulus program.
Why should investors be more concerned over the rising Treasury yields?
The 10 year note has risen sharply since the beginning of May. It is up from 1.6 percent to the current 2.59 percent. The narrowing spread between U.S. and Asian government bond yields are causing investors to sell Asian bonds in favor of U.S. Treasuries. This has had a very negative impact on Asian currencies and stock markets. Investors have pulled out nearly $1.5 billion from emerging market funds by June 5 alone. Asian equity funds have lost $5 billion… this is the biggest outflow of capital we have seen in nearly 2 years.
Bottom line, we need to be watching China closely, however watch the US 10 year note closer. Forex pairs in the South Pacific have been hit hard, the Malaysian ringgit is down 4.3 percent and the Thai bahat has fallen over 6 percent in the recent week alone.
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