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EM Asia FX: We remain UW, albeit with reduced conviction. In this week’s update, we look at how our EM Asia FX sentiment gauges have evolved since the beginning of 2017.This is timely in our view given the generally more positive tone to EM Asia sentiment over this period. Sentiment levels, based off our measure, are at more neutral levels compared with the start of the year. The sentiment gauge is made up of 4 inputs:
1. Spot deviation from its own 200 day moving average;
2. Offshore equity flows (where data is available);
3. The difference between onshore and offshore forward points
4. Implied volatility from the options market.
Each input is standardized as a 3-month rolling Z score and the sentiment gauge is then taken as an unweighted average of these 4 inputs. Higher readings tend to indicate more positive USD sentiment and vice versa for lower readings.
For other currencies in SEA we have generally seen a move lower in the sentiment gauge, albeit not to the same degree as NEA.
The USDMYR sentiment gauge has fallen sharply but remains quite volatile due to shifts in the offshore NDF points. We have also seen a sharp move lower in the USDIDR sentiment gauge, although the shift in actual spot IDR has been quite modest. This may reflect the desire of the Indonesia authorities to maintain reserve accumulation and prevent significant IDR REER appreciation
Interestingly, we have seen a meaningful correction lower in the USDPHP sentiment gauge; however, there has been very little follow through in terms of spot (refer above diagram).
We have seen NDF points move lower, while equity flows have been around flat month to date, which is an improvement on outflows seen in November and December of last year. The fact that this has not been reflecting in lower USDPHP spot levels could reflect similar dynamics to IDR or alternatively continued capital outflow pressures from the Philippines.
Finally, the USDINR sentiment gauge remains close to flat and is at the highest level within EM Asia (refer above diagram). Equity outflows have continued in January despite some improvement elsewhere in the region. Spot USDINR has also remained at elevated levels.
