Asian currencies undermined by trade war

The table below shows these currencies' performance since May 3:

The results are clear: the trade war is significantly impacting APAC FX. Interestingly, the VIX index remains relatively unconcerned at around 16.50 with volatility restrained in other asset classes as well.

The JPY moved from being the second-worst underperformer to the top-ranked outperformer versus USD on a combination of lower US yields and global risk-off. The Thai bhat remains solid on the country's notable, strong growth/low inflation-led divergence from global FX.

The onshore and offshore Chinese currencies are at the bottom of the post-May 3 pile at -2.19% and -2.58% versus USD; we also see additional pressure on the Chinese trading partner proxies of South Korea and Taiwan, whose currencies are -1.28% and -1.74% against the dollar.

A quick, successful resolution of the trade conflict would run profoundly counter to the current, bearish narrative; such a development would likely see the second table's underperformers quickly reverse course. An escalation, however, could push the yen much higher – think 3-5% if China targets Apple or other US tech giants in retaliation for Huawei – with the yuan having the potential to hit 7.00 versus USD.

USDKRW and USDTWD could race higher as well, as both countries would likely push their currencies far lower to counter the deflationary effects of a weaker Chinese yuan.