Bond market slump rattles Asian currencies

Asian currencies fell sharply on Tuesday after a sell-off in US and European bonds caused investors to reassess exposure to emerging markets.

The Indian rupee was the biggest mover, dropping 1.2 per cent against the US dollar to Rs64.24, its lowest since 2013, and falling 0.9 per cent against the euro.

Thailand's baht sank 0.9 per cent against the dollar while the Malaysian ringgit shed 1.2 per cent. The baht has weakened almost 7 per cent in the past month, taking it to the lowest level since mid-2009.

The Indonesian rupiah, which lost 1 per cent during the Asian trading day, remains close to its weakest point since the Asian financial crisis. Some emerging market currencies outside Asia, such as the South African rand and the Turkish lira, have also fallen significantly in the past month.

"You could argue that we're in another taper tantrum-type situation," said Mitul Kotecha, FX strategist at Barclays, referring to the period in mid-2013 when fund managers pulled billions of dollars out of emerging market assets after the US Federal Reserve raised the prospect of an end to quantitative easing, causing currencies to tumble.

A recent report by NN Investment Partners showed that outflows from emerging markets during the nine months that ended in March topped $600bn, more than during the 2008-09 financial crisis.

Tuesday's currency drop came a day after US Treasuries experienced the steepest sell-off in more than two months, the knock-on effect of an earlier rout in European government bonds. As bond prices fall, yields rise.

India and Indonesia have both been popular bets for yield-hungry investors, but the recent rise in yields in the developed world has put pressure on the investment case for both countries.

Mumbai-listed stocks were also down nearly 2 per cent on Tuesday afternoon, the latest sign of reversing portfolio flows into India. The Sensex has now fallen 6.7 per cent in the past month.

In addition to rising global yields, Asia also has been hit by the rebound in oil prices. Though many emerging markets - such as Russia and Brazil - are significant exporters of crude, Asia largely relies on imports of fuel to meet its energy demands.

Lower global oil prices had been seen as positive for Asia, both in terms of boosting growth and helping economies balance the books. All this contributed to making a long position in Asian currencies one of the most popular trades during the first quarter of the year.

However, after falling below $45 per barrel in March, crude prices have since bounced back strongly. On Tuesday, WTI crude was trading at $59.37 a barrel while Brent stood at $64.99.

"You can combine the move in oil and global assets together with a few local factors and it makes for weaker currencies," said Mr Kotecha. "But I don't think we're going to see this sort of pressure extend significantly. Asia still has a good story."

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