Asia FX Talk · Can resilience in Asia continue with higher US yields?

Key arguments

• The reason US yields rise matters more than the rise itself; recent moves are increasingly driven by tighter policy expectations and higher risk premia, including some initial signs of risk-off.
• Asia FX and rates have been benign so far, shown by divergence between Asia FX and US yield spreads, compressed Asia-US yield differentials, and KRW/TWD/CNY outperformance, but this resilience may not continue near-term.
• Multi-decade low implied USD/CNH volatility suggests positioning is already stretched, adding to the caution.
• Longer-end yields are also driven by oil and energy prices plus fiscal and debt supply dynamics, complicating the Fed outlook beyond today's CPI.

Corresponding source evidence

1. What ’s important to note is that the drivers behind the increases in US Treasury yields have increasingly been shaped by expectations of tighter monetary policy coupled with a risk-premia common to both stocks and bonds, even as growth expectations have remained resilient (see Chart 1 below).
2. CHART 1: US YIELDS INCREASINGLY DRIVEN BY EXPECTATIONS OF TIGHTER MONETARY POLICY AND HIGHER RISK PREMIUM Source: Bloomberg, MUFG GMR estimates.
3. Linking this to our region, Asia FX and rates markets have been quite benign so far despite the rise in US Treasury yields, but given the drivers of markets more recently we think the probabilities are that this resilience may not continue at least in the near-term. · near-term