Currency traders miss details of this rout

(Bloomberg opinion) – Stereotypes are difficult to shake, especially in times of distress. As hard as central bankers and politicians are trying to change them, the old investment rules still apply.

Take a look at the currency market. As the epidemic spread to the United States, causing the worst weekly stock sales in a decade, traders have always respected the old hierarchy, offering the Japanese yen and selling the rupee Indonesian. Meanwhile, the yuan has remained strangely calm, although the virus has come from China and two-thirds of its small businesses are struggling to get their workers back to work, according to Beijings' own briefing.

The case of Japan is curious. Judging by Prime Minister Shinzo Abes' response to the crisis, the country seems to be anything but a refuge. The Diamond Princess cruise ship, which was quarantined for days off Yokohama, represented the largest concentration of coronavirus cases outside of China. Despite its high ranking on the Watch List of the Centers for Disease Control and Prevention, Tokyo does not conduct enough diagnostic tests. This slowdown may be partly due to Abas' reluctance to derail the Tokyo Olympics, the New York Times reported.

But currency traders don't look at the details. Buying the yen is a well-worn theme, not the result of careful analysis of the political economy. If you have a bearish position in the US market during trading hours in Asia, buy the yen. The correlation coefficient between the S&P 500 and the dollar-yen pair is a whopping 64% on a weekly basis, the highest among the G-10 countries. The yen suspended its advance on Monday, losing 0.4% in morning trading after the Bank of Japan injected cash into the market. The sharp rise in the price last week leaves hedge funds at odds, exposing them to the risk of short hedging.

Then consider Indonesia, which has not registered any cases, despite the fact that the nation of 264 million figures prominently on the belt and road initiative of China. Although questions remain about the accuracy of the tests, the country still has a lot to please investors. President Joko Widodo has made Indonesia a better investment destination in recent years, cutting red tape and improving the country's onerous land and labor laws. The new capital, estimated at $ 34 billion, could have leading investors ranging from SoftBank Group Corp. to Abu Dhabis sovereign wealth funds.

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Yet the Indonesian Achilles heel is not as much the scarcity of direct investment as foreign sovereign assets, at almost 40% of the total. When the markets get nervous, that money runs away.

In China, the yuan remains resilient, dropping only 1.7% since January 20, when the coronavirus began to attract worldwide attention.

One reason is that a national curfew prevents restless Chinese tourists from going abroad. As a result, there is no need to buy up to $ 14 billion a month in foreign currency or sell yuan of the equivalent amount estimated by HSBC Holdings Plc. It is certainly bullish for the yuan, as China approaches a current account deficit.

The truth is that the yuan remains a highly managed currency. At the beginning of February, the People's Bank of China directed its daily fixation upwards, using a mechanism called countercyclical factor. This tool has become a catch-all that allows officials to ignore the true dynamics of the market and adjust the path of the currency to its liking. As for the Hong Kong yuan bears that are not indebted to the daily trading limit of 2% of their terrestrial counterparts, the central bank has already found clever ways to kill them.

Thanks to a bullish stock market also designed by Beijing, the offshore demand for the yuan was quite strong. While President Xi Jinping has repeatedly promised to maintain China's growth target, investors are now waiting for money by helicopter. This does not seem so far-fetched given the contraction of the economy in the first quarter, which could reach 6% on an annualized basis.

It is at this time of distress that we realize that Asian countries are not changing fast enough. The Japanese yen is too strong for an economy in perpetual deflation; Indonesia can't shake the Fragile Five label; and market reforms are not seen anywhere in China. Optimists can say that the region has learned from past financial crises. Coronavirus proves just the opposite.

(Updates to the yen trading on Monday in the fourth paragraph. An earlier version of this column corrected the direction of the yen trade in the fourth paragraph.)

To contact the author of this story: Shuli Ren at [email protected]

To contact the editor responsible for this story: Rachel Rosenthal at [email protected]

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering the Asian markets. She previously wrote on Barron's markets, after a career as an investment banker, and is a CFA charter holder.

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