According to MUFG’s Michael Wan, Asian foreign exchange (FX) and rates markets have demonstrated notable stability despite a sharp increase in US Treasury yields [1]. Wan points out that this resilience is evident through several measures, including the divergence between Asia FX and both yield spreads and absolute yields in the US, as well as a general compression in Asia rates relative to US Treasury yields [1]. Certain Asian currencies, such as the Korean won (KRW), New Taiwan dollar (TWD), and Chinese yuan (CNY), have shown strength and outperformance during this period [1].
Additionally, implied FX volatility in the USD/CNH pair has reached multi-decade lows, which Wan interprets as an indication of current market positioning [1]. However, he cautions that the resilience of Asia FX may not persist in the near term, given the recent drivers of market movements [1]. Wan emphasizes that the reasons behind rising US yields—specifically, tighter policy and higher risk premia—are particularly concerning for Asia, especially as there are initial signs of a risk-off environment emerging [1].
Wan concludes that the spillover impact on Asia depends not only on the fact that US yields are rising, but also on the underlying causes, with the current environment suggesting growing headwinds for Asian FX markets [1].
CONCLUSION
MUFG’s analysis highlights that while Asian FX markets have so far remained stable amid rising US yields, this resilience is at risk due to tighter US policy and increasing risk premia. Investors should be cautious, as the current benign conditions in Asia FX may not last in the near term.