Long bets cut on Asian FX on dollar resilience; Ringgit bears on the prowl

Long positions on most Asian currencies were scaled back, a Reuters poll showed, as investors contended with unexpected resilience in the US dollar at the start of the year, though long-term expectations of a weaker dollar remained unchanged.

Bullish bets on the South Korean won and Singapore dollar were trimmed the most and were at their lowest since early October, while investors were verging on turning bearish on the Malaysian ringgit, the fortnightly poll of 14 respondents found.

The cut in long bets was a result of the dollar short squeeze in developed markets and not due to a structural change in sentiment towards Asian units, said Jeffrey Halley, senior market analyst at OANDA.

Speculators have been reducing short positions - bets the dollar will weaken - and some analysts have flagged the likelihood they will be forced out of their short positions by a rise in the dollar, or a 'squeeze'.

"With the market pre-programmed to sell dollars for most of 2020, when the plan didn't come together in January as inflation expectations and US yields rose, some doubts have crept into weaker long Asia holders," Halley said, adding it would only be a temporary correction.

Overnight, after the poll results, dollar bulls were held in check after tepid US inflation data was released, sending Treasury yields lower even as Federal Reserve Chairman Jerome Powell struck a dovish tone and vowed to keep policy loose.

Investors were close to turning bearish on the ringgit, with bullish bets at their lowest since late-October, as a renewed COVID-19 outbreak sparked fresh restrictions and raised the need for continued fiscal and monetary accommodation.

Aside from global factors pressuring outlook, ANZ analysts also noted domestic challenges to Malaysia's growth, including weak global demand for its commodity exports as well as sluggish domestic investment and discretionary spending.

Long bets on China's yuan were also lowered, though by a smaller margin, given the central bank's preference to contain excessive speculation and leverage, which has sparked talks of monetary tightening.

Analysts at DBS noted that while the People's Bank of China recently communicated it would not withdraw stimulus too early, adjustments in the open market operations and the resultant impact on short-term rates have suggested otherwise.

While analysts do not expect a sudden U-turn from the PBOC's current position, most expect 2021 will see some return to a tighter policy.

Bullish bets on the Indian rupee also held steady, amid improved growth outlook after the government unveiled a highly expansionary federal budget last week, although increased borrowing rattled bond markets and have sent yields higher.

The Reuters survey is focused on what analysts believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3.

A score of plus 3 indicates the market is significantly long US dollars. The figures included positions held through non-deliverable forwards (NDFs).