UBS predicts 3-4% appreciation for Asian currencies against USD

UBS anticipates Asian currencies (ex-Japan) will appreciate by 3-4% against the USD over the next 12 months, citing Asia's substantial net international investment position and the potential for unhedged US asset exposure to trigger hedging flows, as evidenced by the recent USD/TWD drop. This positive outlook is reinforced by the stabilization and expected further decline in USD/CNY, driven by the PBoC's measured guidance and UBS's view that US-China trade tensions have peaked, potentially reducing FX intervention by regional central banks.

Analysis

UBS projects a 3-4% appreciation for Asian currencies, excluding the Japanese Yen, against the US dollar over the next 12 months. This outlook is fundamentally supported by Asia's substantial net international investment position, where significant holdings of US assets by corporations and investors remain largely unhedged due to high hedging costs. A key potential catalyst for this appreciation is a sudden increase in hedging activity, exemplified by the recent 10% drop in the USD/TWD pair. The trend could be further amplified if regional central banks limit foreign exchange interventions to avoid US scrutiny over currency manipulation amidst ongoing trade discussions. Reinforcing this view is the continued recovery of the Chinese Yuan, which has stabilized in a 7.15-7.20 range against the dollar since mid-May, with the People's Bank of China guiding the official fixing rate down from a high of 7.21. UBS anticipates further, albeit measured, CNY strength, predicated on broad USD weakness and the belief that US-China trade tensions have passed their peak, though China's subdued domestic growth and inflation will likely moderate the pace of appreciation.

Key Decisions for Investors

• Investors with a medium-term outlook should consider positioning for Asian currency appreciation against the US dollar, aligning with UBS's 3-4% forecast.
• The daily USD/CNY fixing by the PBoC should be monitored as a key bellwether for regional currency direction, as its trajectory signals China's tolerance for appreciation.
• Traders should remain alert to signs of increased FX hedging by Asian institutions, as this could act as a powerful, non-linear catalyst for currency strengthening, similar to the recent USD/TWD move.
• The thesis is contingent on the view that US-China trade tensions have peaked and that broad USD weakness persists; a reversal of these conditions presents the primary risk to this outlook.