Bullish bias for USD/Asia – RBC CM

Research Team at RBC Capital Markets have a bullish bias for USD/Asia, underscored by their out-of-consensus 2017 USD/CNH forecast of 7.53.

Key Quotes

“That said, there are appealing relative value opportunities within the region in 2017. From current levels, we are overweight PHP, INR, IDR. We are neutral CNH and KRW and bearish THB, TWD, and SGD. Finally, it may be too early to call a bottom in MYR, but we will look for opportunities to enter strategic longs on key crosses.” 

“Relative value in AXJ FX will be driven by four key themes: 

(1) Different domestic growth and inflation trajectories, overlaid with differing leverage dynamics, mean that there is more room for monetary policy accommodation in some economies, relative to others. India and Singapore have more scope to ease monetary policy than Philippines and China, for instance.

(2) The willingness/capacity/likely success of structural reforms and ability to present a coherent narrative are also a source of divergence. All economies in the region are reliant on restructuring and productivity gains to drive the next phase of growth. China, India, and Indonesia are obvious candidates, but other economies are often overlooked: Singapore (productivity), Malaysia (labour market and education), and Philippines (simplify regulations to encourage private and public investment) are just some examples.

(3) Varying degrees of political risk and political capital in the region will determine the reform progress. China, India, Philippines, Malaysia, South Korea, Taiwan, and Thailand stand out as ones to watch.

(4) Notwithstanding the uncertainty surrounding the composition of Trump’s fiscal easing and trade and foreign policy, external debt metrics, current account funding dynamics, and relative  dependence on global demand comprise the final factor that will determine regional relative value. Malaysia and Indonesia are the most vulnerable to a stronger USD and increasing US interest rates given their weaker external debt metrics compared to China, India, and Philippines. Philippines is also relatively insulated from rising protectionism given the stronger domestic demand intensity of growth relative to South Korea, Taiwan, and Singapore, which are also vulnerable to further RMB depreciation.”