BUZZ-COMMENT-Buoyant CNY shelters AXJ currencies from risk meltdown

Jan 25 (Reuters) – The yuan’s steady rally versus the U.S. dollar has shielded Asia-ex Japan currencies from the current bout of risk aversion in financial markets and this is likely to continue given China’s record exports, current account surplus and relatively attractive yields.

Heavy corporate demand for the yuan ahead of the Lunar New Year holiday and the Chinese central bank’s mostly hands-off approach helped the CNY hit a 3-1/2-year high on Monday nL4N2SX04Z.

With most AXJ currencies not freely tradable and low liquidity in these currency pairs outside Asian hours, traders increasingly focus on the People’s Bank of China’s daily CNY fixing rate for direction.

This has helped buffer the likes of the Indian rupee and Indonesian rupiah from bouts of USD strength. They are normally very sensitive to U.S interest rate expectations and moves in Treasury yields due to their current account deficits and reliance on foreign inflows.

The INR and IDR have only weakened by 0.35% and 0.6% this year despite growing expectations of four Federal Reserve rate hikes in 2022 and a 28-basis-point rise in the 10-year Treasury yield in January. The currencies of both oil-importing countries have also weathered a near 11% rise in crude prices in 2022.

The global selloff in stocks has hardly dented normally risk-averse Asian currencies this time, unlike many of their emerging market counterparts. Selling USD/AXJ rallies with an eye on the yuan remains the preferred strategy.

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(Krishna Kumar is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai)

((krishna.k@thomsonreuters.com))