Globally, economic outturns converge amid slimmed C/A gaps – Standard Chartered

National growth and inflation rates have converged amid steady, moderate global growth while C/A imbalances have narrowed, leaving a smaller rebalancing role for FX trends, suggests Robert Minikin, Head of Asian FX Strategy at Standard Chartered.

Key Quotes

“Against this backdrop, implied carry in FX forwards should play a bigger role in driving investor and corporate hedging decisions – even amid short-term volatility. EM currencies offering attractive ‘real’ carry in FX forwards (after expected inflation) are the CNH, IDR and INR in Asia, and the MXN, TRY, RUB and BRL elsewhere in emerging markets.”

“Valuations, local economic dynamics and risks around our central scenario help identify attractive opportunities. In Asia, the MYR is cheap by historical standards and joins the INR and IDR as our top ‘picks’. We are upbeat on Indian and Indonesian growth. Poor visibility on China’s FX policy and a risk of higher US Treasury yields argue for Neutral exposure to the CNY and outright Underweights in the JPY, KRW and TWD in North Asia.”

“In Latam, we think the ARS and MXN are best placed to deliver long-term outperformance on growth and valuations, respectively. In EM EMEA, we similarly favour the RUB over the TRY (and the HUF as a low-yielder). Amid the broadly benign commodity price outlook, downside risks to gold prices lurk (a warning flag for the ZAR); we warn against over-exposure to heavily specialised commodity exporters (such as the COP and CLP). Sub-Saharan Africa frontier FX prospects remain overshadowed by macro imbalances, even as export prospects improve.”

“Within G10, the European Central Bank is likely to taper QE from start-2018 – diminishing policy divergence. Ebbing political risks and improving portfolio flows suggest that the EUR-USD cyclical low is past. While we stay broadly JPY-bearish, the CAD, AUD and NZD seem well placed to close the undervaluation gap. In The Long View, our in-depth look at INR valuation sees the INR not far from ‘fair value’; the RBI will likely focus on containing FX volatility and building FX reserves on new capital inflows. Policy makers may increasingly focus on the CNY-INR bilateral rate.”