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Asia FX & IR Strategy Weekly Summary - 7 March 2014

Core Content Overview

This document outlines the key market outlook for FX and interest rate (IR) strategies in Asia for the week of 7 March 2014. It emphasizes the interplay between monetary policy, economic data, and market sentiment across major Asian currencies, with a focus on China, Indonesia, India, Malaysia, South Korea, and others.

Main Views and Key Information

What's Crucial Next Week

• Domestic Events Dominance: China will report trade data over the weekend and credit/money supply figures next week. The data may indicate continued easing of credit policy to support growth. BoT (Thailand) and BI (Indonesia) are expected to keep rates unchanged on 13 March, while the BoK (South Korea) is expected to remain on hold.
• Global Events: The US has a light data calendar with retail sales, PPI, and consumer confidence reports. The Fed's Plosser will speak in Paris, and US-EU trade talks will take place in Brussels.
• Economic Outlook: China's economy is expected to show a weak start in growth, with trade surplus narrowing and inflation declining. Thailand and South Korea may see rate cuts, while Indonesia's rate hike is expected in Q2. India's industrial production is expected to shrink YoY due to base effects.

FX and Rates Strategy Highlights

China: Reform, Regress, Repeat

• Policy Shift: PBoC has shifted back to an easing stance to support growth, with regulatory tweaks continuing in the background.
• Market Reforms: Expect incremental steps in deposit rate liberalization, municipal bond market development, and corporate bond defaults. The focus is on stabilizing growth before advancing reforms.
• Recommendations:
  • 5Y SHIBOR-repo spread widener (target 100bps, stop at 50bps).
  • 2Y5Y SHIBOR curve steepener (target 16bps, stop at -14bps).
  • Maintain overweight on 5Y onshore CGBs.

Asia FX & IR Curve Dashboard

• Current Market Levels:

  • CNY: 6.131
  • CNH: 6.117
  • INR: 62.32
  • IDR: 11605
  • KRW: 1069
  • MYR: 3.270
  • PHP: 44.58
  • THB: 32.41
  • TWD: 30.22

• FX Strategy:

  • Close long USD/SGD and USD/CNH.
  • Buy INR and MYR.
  • Stay received in MY and TH rates, steepener in KR, flattener in IN.

• IR Strategy:

  • Hold overweight in Indonesian bonds (shorten duration).
  • Stay received in MY and TH rates.
  • Steepener in Korea and flattener in India.

Special Notes

• Carry Trade: The positive carry from Asian local markets continues to attract inflows, especially with US rates stagnant.
• Market Reactions: The recent default of Chaori Solar has not caused significant market reactions, suggesting that the market is becoming more accustomed to defaults.
• Regulatory Changes: The introduction of new monetary tools and the potential for deposit insurance and bank bankruptcy laws are part of China's financial reform efforts.

Conclusion

The strategy highlights the importance of monitoring both domestic and global economic data, with a focus on China's monetary policy and its impact on regional currencies. The outlook is cautiously bullish for some markets, with an emphasis on carry trades and strategic positioning. The key is to balance the risk of overexposure with the potential for further market adjustments and policy changes.