FxWirePro: Glimpse at Emerging Asian central banks and EMFX vols

Recently, central banks in Indonesia and the Philippines delivered a 25bps and 50bps rate hike respectively, suggesting that the policy makers are keen to narrow the rates spread against the Fed as capital outflow is an immediate concern. 

We suspect that much of the non-responsiveness of EURCNH skews this year owes to the above-average bid for EUR puts in general, reflecting the option market’s nervousness around the Italian budget. Such skittishness explains why other EUR/Asia risk-reversals are also priced near 5-yr tights (e.g. EURKRW). 

Broad USD Index targets shifted higher due to higher USD/Asia, but baseline FX forecasts elsewhere unchanged except for risk biases.

The trade weighted USD year-ahead target is shifted higher by 1.1% in the forecasts given the higher targets for USDCNY and other USD/Asia pairs. The bottom-up projected USD index how exhibits a gradual grind higher by 2.4% over the coming quarters, compared to a more sideways range in our prior projections.

In addition, Bank of Korea’s chief Lee also highlighted that he is also paying more attention to the rates spread between South Korea and the US, which has fuelled expectations that the BOK could hike the policy rates before the end of the year. While this is not a consensus call yet, the IRS has jumped, indicating that the market sees the risk of higher rates over the foreseeable future.

JPM’s projections for end 2019, USDCNY (7.23) is 5% above current spot levels. For the current account surplus economies of KRW, TWD, SGD, THB and MYR, our forecast profile has assumed a 0.6 beta with respect to the CNY move. 

We consider a second idea in the Asian vol space, this time aimed at harvesting a positive Carry and to offer some protection in case that the trade dispute between US and China were to intensify. We were recommending entering a long 6M USDKRW vol/short 6M USDTWD vol idea for benefitting from the relative cheapness of KRW vol compared to regional peers. One month and a half on, it is SGD vol which catches our attention as a possible laggard in the Asian space, if ever as a cheap hedge for the short-vol leg rather than as a conviction trade for hedging an extended risk-off scenario in the region. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly CNY spot index is inching towards -27 levels (which is mildly bearish), while hourly USD spot index was at 111 (bullish) while articulating (at 14:29 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex