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Asia FX & IR Strategy Summary - 21 February 2014

Core Content

This document outlines the FX and interest rate (IR) strategy for the Asia region, focusing on market trends, central bank actions, and currency forecasts for the upcoming weeks and months. It emphasizes the current state of the RMB, changes in FX forecasts, and the outlook for key currencies such as SGD, MYR, IDR, KRW, and others.

Main Points

What's Crucial Next Week

• G20 Meeting: Expected to generate soundbites on QE exit calibration, but likely not to have significant impact.
• Asia FX & IR Data: Limited major monetary policy meetings, with key data releases from India, South Korea, and others.
• RMB Carry Trade: PBoC is engineering a squeeze in USD/CNY, not an unwind of the carry trade. The central bank is likely maintaining control over the RMB's value.
• Risk Premia: Compressed in local markets, suggesting a shift towards range trading. Investors should remain cautious and prepare for potential reversals.
• Korea Steepeners: The KRW NDIRS curve is flattening, and steepeners are recommended. The BOK is expected to keep rates on hold for the rest of the year.

Changes to Asia FX Forecasts

• USD/Asia Trend: Still bullish in the long term, but near-term dollar strength is tempered due to mixed factors.
• RMB Carry Trade: The implied yields have dropped, reducing the appeal of the carry trade.
• IDR: The offshore fixing mechanism is shifting to JISDOR, which is positive for IDR and suggests a reduction in liquidity risk premia.
• KRW: Despite strong fundamentals, the won is expected to weaken in the short term due to reduced US growth support and authorities' preference for a weaker won.
• SGD: The SGD is expected to test the bottom of the S$NEER band, with MAS likely to cap it. The USD/SGD is forecasted to trade at 1.30 by year-end.
• MYR: The ringgit is expected to consolidate in the near term, with USDMYR likely to trade between 3.30 and 3.40.
• TWD: TWD is losing appeal as a RMB proxy due to increased CNH accessibility.
• THB: Political instability and weak growth outlook suggest consolidation in the short term, with a potential grind higher in the long term.

Key Currency Forecasts

RMB Analysis

• The RMB squeeze is engineered by PBoC, not a carry trade unwind.
• PBoC is likely maintaining the status quo to prevent a depreciation trend.
• The RMB is expected to stabilize in the short term, with potential for modest depreciation in the long run.
• The key indicators to watch for include PBoC's USD selling, spot relative to the fixing, and forward yields.

Asia Risk Index

• The Asia risk index is now below neutral levels, indicating a shift towards caution.
• Risk premia has compressed, suggesting that the short-term rally in local markets may be over.
• A range-trading environment is expected, with potential for re-engagement in USD shorts if risk premia widens.

Key Information

• G20 Meeting: Expected to have limited impact on FX and IR markets.
• PBoC Actions: PBoC is managing the RMB squeeze, possibly in preparation for the March NPC meeting.
• Currency Trends: USD/Asia is expected to maintain a long-term uptrend, but near-term gains are tempered.
• Investment Recommendations: Steepeners for KRW, long positions for IDR and INR, and caution for SGD and MYR.
• Market Indicators: Risk premia compression, FX implied yields, and central bank interventions are key signals for market direction.

Strategy Highlights

• KRW Steepeners: Recommended at 52bps, targeting 70bps with a stop at 43bps.
• SGD Flattening: The SGD curve is expected to flatten due to the potential for MAS to cap the currency.
• IDR Stability: IDR is expected to trade within a stable range due to improved tradability and reduced liquidity risk.
• MYR Flattening: MYR is expected to consolidate due to weak growth and low carry.
• TWD Consolidation: TWD is likely to consolidate after breaking above its previous high, with a target of 30.68.

This document provides a comprehensive overview of the current FX and IR strategy for the Asia region, highlighting key trends, central bank actions, and investment opportunities. It serves as a guide for investors to navigate the complex market dynamics and make informed decisions.