Asia FX: Positioned for weak risk sentiment - Nomura

The analysis team at Nomura explains that global risk sentiment has weakened in recent sessions, especially following the US political developments on 17 May.

Key Quotes

“Our global strategy team currently believes the odds of a presidential impeachment are low, there remain prominent headline risks, and these developments are expected to have a negative impact on President Trump’s ability to pursue his fiscal/regulatory reform agenda (including tax cuts). In coming sessions, our focus will be on the evolution of global market risk sentiment, particularly for US equities, where the repricing of the Trump trade has been limited relative to US rates markets and the broad USD. Further weakness in equity markets could bode poorly for Asia FX, particularly for the equity sensitive currencies like KRW, TWD and INR. Furthermore, specifics on the FOMC’s balance sheet policy in the May meeting minutes (24 May) and Fed-speak could also impact equity markets.” 

“Overall, our Asia FX portfolio emphasizes RV positions with a bias to be short risk and slightly long USD. On the long Asia FX side, we are recommending INR, THB and PHP based on their strong BOP/macro fundamentals and high reserve adequacy. In India, we have seen a resumption of bond and equity inflows amid strong growth and continued economic reforms while, in the Philippines, the selection of a credible central bank governor and stable inflation ameliorate our concerns around BSP being viewed as behind the curve. Finally, in Thailand, we note an improving macro backdrop and stabilising portfolio flows amid low foreign ownership (in our view).”

“Our short Asia FX recommendations include short CNH, a position which we have been reducing. A constraint to the performance of this trade has been the continued capping of USD/CNY fixings by the People’s Bank of China, while credit/macro concerns in China do not appear to be worsening significantly at this juncture.”