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Asia Macro Strategy Summary: Morgan Stanley FX/Rates Report

Report Overview
Authored by Gek Teng Khoo, dated January 27, 2025. The report analyzes FX and rates trends in Asia, driven by market expectations of reduced US-China trade tensions, with a base case of phased US tariffs on China. Advises caution on Asian FX until tariff clarity, while highlighting opportunities in rates.

Key Insights

• FX/Rates Rally: Broad rally in Asian currencies (e.g., THB, MYR, PHP) reversed to near pre-US election levels amid hawkish trade policy concerns. The report emphasizes high beta of currencies like INR and THB to US tariffs.
• Tariff Base Case: Assumes US tariffs on China will be implemented; avoid overreacting to easing trade rhetoric without timeline clarity.
• Risk Aversion: In rates, US-led trends offer opportunities; recommended trades include long positions on 10-year IndoGBs and short on TWD/JPY.

Main Trade Ideas

1. Add Long 10-Year IndoGBs: Target 6.50%, stop loss at 7.30%; supported by US yield expectations and Indonesia's supportive economic outlook.
2. Maintain Short TWD/JPY: Target 4.50%, stop at 4.83%; based on high export sensitivity to US tariffs.
3. Exit Shorts on CNH/INR and USD/THB: Due to reprice risks.
4. Long FX-Hedged G-Secs: India's budget expected to continue fiscal consolidation; target on 10-year G-Secs at 6.50%.

Country-Specific Views

• India: Budget on Feb. 1; expect INR 11 trillion G-Sec issuance, stay long FX-hedged with neutral FX stance if real effective exchange rate corrects.
• Singapore: SGD rates likely underperform US rates if tensions rise; cautious on valuation as policy easing may not sustain strong S$NEER.
• China: CGB yield decline mirrors JPY 1990s but with less magnitude due to Chinese SB policy tools; CNH may underperform amid soft growth and tariff risks.

Risks and Considerations

• Unclear timeline for US tariffs amplifies FX volatility.
• Inflation data and policy divergence in key Asian economies add uncertainty; UIP breakdown in Singapore suggests nonzero risks for SGD/rates.

Disclaimer
Morgan Stanley has conflicts of interest due to business relationships with covered companies. Equities research may include principal transactions; past performance is not indicative of future results.