Risk Markets From China Tech to EM Currencies Are Back in Favor

(Bloomberg) -- Some of Asia's most risk-sensitive currencies and stocks are back in favor as China reopens its economy and traders bet that the dollar may have peaked for now.

South Korea's won and the offshore yuan have rallied over 1% since Shanghai started rolling back virus curbs in mid-May. The region's stocks have also climbed, with the Hang Seng Tech Index advancing almost 3% during the period.

The reopening of China's economy has sparked a swift turnaround in sentiment toward Asia, as investors bet that the move will ease supply-chain disruptions and spur demand for commodities. Speculation that the dollar may have hit a ceiling for now is also lending support, with the likes of Goldman Sachs Group Inc. and Fidelity International seeking to add to their emerging-market portfolios.

Gains in Asian currencies this week were spurred by factors including a pullback in the dollar, easing restrictions in Shanghai and better-than-expected China PMI data, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “The Korean won and Taiwan dollar, which are the most sensitive to equity flows, stand to benefit the most,” he added.

The won led gains in emerging Asian currencies on Friday, rallying as much as 1.1% against the greenback. The offshore yuan and Indonesia's rupiah each strengthened 0.3%. All three currencies fell to the lowest in over a year last month.

And it's not just the region's foreign-exchange markets which are gaining.

Spreads on Asia's emerging market dollar notes are headed for a third straight week of narrowing, the longest such streak since April 8, a Bloomberg index shows. They traded at 303 basis points over comparable Treasuries, down from a this year's high of as much as 375 basis points on March 15.

A recent slew of disappointing US data, including a private jobs report on Thursday, is fueling fears of a slowdown and driving expectations that the Fed may deploy a less aggressive pace of tightening. The Bloomberg Dollar Spot Index has fallen 3% after reaching the year's high in May.

“Some jitters on US growth, alongside slightly shaky US data, could lead to incremental doubts on the extent of Federal Reserve hawkishness that can eventually materialize, helping to cap interim dollar strength,” said Yanxi Tan, a currency strategist at Malayan Banking Berhad.

The optimism is also evident in stocks. The MSCI Asia Pacific Index is on track for a third week of gains after declining almost 30% from a peak in February 2021. A gauge of Chinese stocks listed in the Asian financial hub has climbed more than 2% in the past five days.

“Shanghai's reopening has triggered a rally in the China/Hong Kong market over the past few days,” Richard Tang, equity research analyst for Asia at Julius Baer, wrote in a note. “Our view remains the same –- the market has likely troughed, while the pace of recovery will depend on the progress of reopening, which is likely to be gradual. Reopening plays include internet, auto and consumer stocks.”

Outside of China, money is also trickling into other emerging Asia stock markets. Inflows into regional equities total a net $2.9 billion this week, the largest for a five-day period since February, according to data compiled by Bloomberg.

But, some others caution that it may be too early to say the worst is over.

“Asian currencies have been supported by the softness in the broad dollar and probably the peaking of China growth pessimism,” said Frances Cheung, rates strategist at Oversea-Chinese Banking Corp. “That said, the overall risk sentiment does not appear to have settled well into the risk-on zone yet, with lingering growth concerns and the market staying responsive to data prints.”

(Adds spreads on Asia's emerging market dollar notes in seventh paragraph)

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