A 14-year high hedging cost is hardly scaring Asian investors

SINGAPORE – Local currency investors from emerging Asian nations are not shying away from hedging their overseas investments even as the cost of protection rises to the highest in 14 years amid concern that dollar weakness may erode the value of their portfolios.

The aggregate hedging cost for funds from seven emerging Asian economies has risen to the highest since at least 2009, according to data compiled by Bloomberg, mainly due to the divergence between their monetary policies and those of the United States.

And while the prospect of a US Federal Reserve rate pause ensures that gap does not widen further, increasing bearishness towards the dollar is prompting investors to safeguard their holdings.

“Asset managers, lifers and sovereign wealth funds have ended up chasing the fall in dollar-Asia as they have rushed to hedge their dollar investments, amid a fear of missing out,” said OCBC Bank strategist Christopher Wong, adding they are concerned “that a further gap lower in the dollar will incur an even larger cost of hedging”.

Asian currencies rose 1.5 per cent versus the dollar in July as they snapped three straight months of losses, according to a Bloomberg Index.

Meanwhile, asset managers boosted their short dollar bets to a record level in July, while hedge funds also flipped to a net short position on the US currency in the same month, Commodity Futures Trading Commission data shows. 

“If investors are bearish on the dollar until the year end, then of course hedging now would be the best strategy,” said Mr Stephen Chiu, a currency and rates strategist at Bloomberg Intelligence.

Hedging costs may remain elevated as long as the Fed does not appear to entertain any rate cuts in the near term, he said. BLOOMBERG