Hot Spots From Yen Carry Trade to Resurgent EM Asia Gird for Fed
In This Article:
(Bloomberg) -- A potential decision by the Federal Reserve this week that triggers a rally in the yen may unsettle emerging-market investors, reviving memories of the global volatility seen in August.
Most Read from Bloomberg
-
California’s Anti-Speeding Bill Can Be a Traffic Safety Breakthrough
-
An Artist Reimagines the Spaces of Childhood, With Thorny Results
Last month’s yen rally, driven by the Bank of Japan’s rate hike, hit the EM carry trade hard and sparked the worst rout in the Nikkei 225 since 1987. This, combined with a significant miss in US nonfarm payrolls, led to a spike in Wall Street’s favorite volatility gauge, with US technology stocks suffering their worst start to a month since 2008.
This time, there are similarities. Investors are split on whether the Fed will kick off its easing campaign with a standard 25 basis point cut or a larger one. A half-point reduction may raise doubts about the health of the US economy, prompting a selloff in emerging Asia assets. It may also drive the yen stronger, prompting investors to unwind their carry positions in risk assets funded by the Japanese currency.
On the other hand, a quarter-point cut may work in favor of equities, with the smaller Southeast Asian markets likely being key beneficiaries.
Here’s a look at what market participants are expecting.
Watching Yen
The yen’s trajectory is closely tied to expectations around Fed rate cuts. The currency surged past the 140 per dollar mark on Monday, reaching its strongest level this year, as speculation grew about a half-point cut.
This has spooked Japanese investors, as a bigger Fed cut may boost the yen further, hurting the earnings of the nation’s exporters. Traders, hedge funds and institutions still have fresh memories of last month’s sharp rally in the currency following the Bank of Japan’s rate hike, which fueled a wave of selling across global markets.
After the Fed’s rate decision, attention will turn to the BOJ meeting on Friday. While most economists anticipate no changes in policy, investors will be looking for any signals hinting at another possible hike in December.
Bets on Smaller Markets
The smaller Southeast Asian markets have become a top choice for money managers positioning for the shift in Fed’s policy. Four of the five best-performing Asian equity benchmarks this month are from the region, with Thailand leading.
For the past two months, fund managers have boosted positions in sovereign bonds in Thailand, Indonesia and Malaysia. They’ve been net buyers of Indonesian, Malaysian and Philippine equities for three months. These inflows have made Southeast Asian currencies the best performers in emerging markets this quarter.