Recovery in Emerging Asian Currencies Runs Aground on U.S. Tariff Risk

(Bloomberg) -- A nascent recovery in emerging Asian currencies looks in danger of unraveling as escalating U.S.-China tensions threaten to delay a global economic recovery.

Last week's rally in regional currencies gave way to steep losses Monday after U.S. President Donald Trump raised the prospect of tariffs against Beijing over the spread of the coronavirus. A slew of weak manufacturing prints also reinforced the risks confronting Asia's export-dependent economies.

Monday's sell-off was headlined by the region's high yielders, the very same currencies which had outperformed their peers last week. Indonesia's rupiah tumbled almost 2% after surging 3.5% in the previous week while India's rupee plunged about 1% following a 1.8% gain.

The reversal highlights the fragile mood even as the virus outbreak shows signs of stabilizing, with strategists now warning of further losses in currencies going forward.

“The tariff risk returning to the focus could add to the sell-off pressure in financial markets again,” said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank Ltd. “The risk rebound in late March came sooner than expected and markets could change back to risk-off mode again.”

The slump in manufacturing comes amid signs that regional economies will face more headwinds in the near term. Indonesia's central bank has cautioned that the nation's economic growth may drop to 0.4% in the second quarter, lower than a previous estimate of 1.1%, due to the virus outbreak. India's domestic output may take another hit after the government extended the nation's lockdown by another two weeks on Friday.

“With investor sentiment taking a back seat and concerns of U.S.-China tensions back on the radar, investor flows into the high yielders is likely to ease up,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “On top of all these, the month of May has traditionally been a poor one for Asian currencies.”