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China received less attention than normal, but prevailing sentiment was that little will change post-CPC: reforms and deleveraging would be slow and targeted, risks of the debt crisis are low (for now), and ultimately the downside to growth will be heavily managed.
The positive view on CNH as a carry trade (outright or against low yielding peers). Some had short RMB portfolio hedges but most agree that tails risks are contained. Positioning in Asia markets was not high given volatility and opportunities in other regions.
Periods of sharp rises in oil prices can drive short-term divergence in the usually positive correlation between ‘EM Asian equities / FX’ and ‘oil prices’. We find that oil prices rising by more than 20% over a 2-month horizon –as is presently the case can be the trigger point for such episodes. EM Asia FX can weaken, although basket-focused currencies, such as SGD, tend to do better during such times.
In general, clients had a bearish view on PHP, little positioning in HK or SG rates, mixed views on Malaysia, positive on INR and IDR for carry but don’t see a lot of appreciation, and growing worries given growth is lagging.
On USDKRW, clients are surprised by recent strength but find it difficult to get short dollars at these levels. North Korea hedges did not feature prominently in client questions.
A limited loss structure in KRW within the gamma bucket (1m-2m) is more appealing to fade this risk premium. Entry point within the trading range. The entry point is appealing, with USDKRW trading close the middle of the six-month intraday range (1,108-1,161). The top-end should hold if North Korea risk premium subsides and the lower end could be protected by intervention. Pressure on EM vol. EM FX vol should compress absent a negative growth shock in the US or China amid a glacial pace of DM policy normalization, helping to drag down KRW vol.
Sell volatility in limited loss structure USDKRW 2m implied volatility is up by two vol points since the North Korean hostilities began after falling three vol points prior to that. An easing of tensions should see volatility compress alongside the general trend in EM. The richness of implied versus realized vol is at the high end of the five-year range, suggesting an opportune time to harvest vol premium.
Furthermore, KRW skew and convexity is by far the most expensive within the EM universe, indicating that short vol strategies could be favorable. Thus, uphold USDKRW 2m double no-touch, knock-out 1,108/1,162 Indicative offer: 11% (spot ref: 1118). Maximum leverage: 9 times.
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