The U.S. dollar lowered from a one-month high reached on Monday overnight. Investors sought safety in the risk-off Japanese yen and the Swiss franc, bracing for a potential default by property developer China Evergrande. Meanwhile, global markets managed to stabilize. Analysts think Monday’s selloff in global markets was mainly caused by option-driven flows in an environment of poor market liquidity. Some traders perceived it as an opportunity to participate in “buy the dip” trades.
However, recent surveys showed that equity market positioning remains near historical highs. In addition, Tuesday’s price action restored some calm to forex markets. Cyclically oriented currencies such as the Australian dollar and the Norwegian crown rebounded sharply after suffering losses on Monday.
61% of traders planned to increase equity market exposure, according to a JP Morgan weekly investor survey. Furthermore, last week, a BofA survey showed that investor positioning in equities among its private clients was near record highs.
Despite this news, default concerns continued to stalk China Evergrande Group even though its chairman tried to lift confidence in the property company. Financial markets are waiting to see if Beijing intervenes to hinder any domino effects across the global economy.
Charalambos Pissouros, the head of research at JFD Group, noted that with no signs of a possible solution on the horizon, the case for the default risks would likely continue growing and adding pressure to the broader risk appetite.
The dollar declined to 93.12 against the basket of major currencies after skyrocketing to its highest level since August 23. It traded at 93.45 in the previous session. At the same time, U.S. equity futures climbed up by 1%.
How did the Aussie and the Kiwi trade?
The Australian dollar and the New Zealand dollar jumped by 0.1% each on Tuesday. The rally in markets along with soaring commodity prices also supported the Norwegian crown, which surged forward by almost 1%. The currency erased most of its overnight losses.
Traders remained broadly cautious as forex markets stabilized after Monday’s selloff. A currency market volatility gauge soared to its highest levels since end-July. Before Evergrande’s debt crisis unnerved global markets, traders has supported the greenback ahead of a Federal Reserve meeting this week. Economists expect the Fed policymakers to signal expectations of a tapering plan to be postponed until November.
On Tuesday, the Swiss franc changed hands to 1.0869 per euro. However, the currency remained near Monday’s high of 1.08750.
Meanwhile, emerging Asian equities attempted a modest recovery on Tuesday even as broader markets continued to worry about contagion risks from debt troubles at Evergrande. Despite that, Indonesian stocks tumbled down ahead of a central bank meeting.
Most regional currencies climbed up against the greenback, regaining some recent losses while traders remained focused on the Federal Reserve’s stimulus tapering along with Evergrande.
Stocks in Thailand and the Philippines rebounded from multi-week lows. The Philippine peso stopped a three-day losing run and instead soared by 0.2%.
How is Evergrande influencing the Asian currency market?
On Tuesday, trading volumes remained slim as China, South Korea, and Taiwan markets were shut. In addition, gains were limited by concerns of Evergrande defaulting on its massive pile of debt. Worries that the crisis could further damage an already suffering Chinese economy even sent Wall Street sharply lower on Monday.
Alvin Tan, the head of Asia FX strategy at RBC Capital Markets, noted that the Evergrande situation has congealed with ongoing global growth worries to generate genuine risk-off market conditions finally. However, he also added that there’s less chance for the developer’s debt troubles to spark a full-blown meltdown in Asian markets.
According to Tan, Evergrande is one of the symptoms of a deteriorating property market in China. Most likely, market sentiment will remain poor, though, until investors get clear indications of state-led containment measures from Beijing.
Jakarta’s benchmark index plummeted down by 0.9% on Tuesday. As a result, the rupiah traded almost flat. Analysts expect Bank Indonesia (BI) to maintain current interest rates to support the currency, even though soaring coronavirus infections and lockdowns likely weighed heavily on the nation’s third-quarter growth.
Over the recent weeks, Indonesia has been on a tentative path to recovery from the Covid-19 pandemic. On Monday, it reported its lowest daily case count since August 2020. In addition, the government eased some restrictions in Java and on its resort island Bali.
Meanwhile, the baht underperformed its peers in Thailand, tumbling for the fourth consecutive session. On Monday, the country increased its public debt ceiling, attempting to allow the authorities to raise more funds needed to support the tourism-reliant economy battered by the pandemic.
What about the Turkish Lira?
As the greenback weakened, the Turkish lira soared on Tuesday. The South African rand also managed to snap a five-day losing streak.
Investors are waiting for central bank decisions in Turkey and South Africa. They expect both banks to hold rates. Turkey’s central bank chief struck a dovish tone recently, though.