FxWirePro: A glimpse on EM Asian FX trade drivers

We re-enter two positions (long USDTWD: sentiment shifting and long INRKRW at the low end of the three-year range) that were previously stopped out under the assumption that sentiment toward EM currencies is starting to shift and high yielders will outperform low yielders.

Long USDTWD given a) the dislocation between spot and interests rate differentials in recent months, b) the likelihood that the rate differential will move further in favour of USD upside (Fed tightening and CBC easing), c) negative forward points offer a positive carry structure to get long dollars and d) technicals indicate a recovery from stretched positioning and an upturn from a double bottom.

Hedging by onshore lifers is an unquantifiable risk. The next hurdle will be closing above the 100d moving average (32.08).

Long INRKRW owing to a) the near the low end of the three year range provides a good entry point, b) smooth transition to new governor keeps RBI credibility intact and the likelihood that the low vol intervention strategy continues (changed from Rajan to Urjit Patel), c) a positive carry structure to fade the regional currency (KRW) that has appreciated the most compared to its weakest point this year, and d) to capitalize on a recovery from oversold conditions and a double bottom topside breakout.

Trading corner:

But, on hedging grounds, amid growing concerns of upswings of this pair, it is advisable to go long USDTWD 3m NDF (at spot ref: 31.35) with a target of 33.14 (+5.70%) and a strict stop slightly below the recent low at 30.59 (shy above -2.42%).

The trade horizon is 3-6 months. With negative forward points, carry in the 3m tenor is positive at 19bp/month.