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Asian equities staged a rebound after starting the session on the back foot following the weak finish in US stock markets on Friday on concerns about potential tariffs on more imports from China. Considerable attention will be on comments from Chinese President Xi Jinping at the Boao Forum on Tuesday. Germany reported unexpected falls in trade figures this morning, including a 3.2%m/m drop in exports.
Overall, while global long-end yields may continue to remain suppressed in the current environment, dollar behavior is expected to remain bipolar. At this juncture, the greenback may remain negatively afflicted against the EUR and the GBP, but hold up up against the cyclical (antipodeans) instead. Depending on the severity of prevailing global trade tensions, EM FX may remain relatively sheltered but if risk aversion heightens appreciably, expect the USD to climb against EM/Asian FX instead.
Long SGD, TWD and KRW, but cautious on INR, PHP & IDR: Against a backdrop of US twin deficits heading from 5.9% of GDP in the calendar year 2017 to nearly 10% in 2019, we maintain our long positions in KRW, TWD, and SGD: three currencies underpinned by robust starting points of current account balances/Net International Investment positions (NIIP).
As for the three currencies with current account deficits (INR, IDR, and PHP), though valuations are not demanding, flow pressures will probably prove challenging.
While we do not have open positions at this juncture, our assessment is INR and PHP have greater potential to weaken as opposed to IDR. In India, a potential tightening in banking sector credit conditions may be consistent with INR weakness even as a prolonged period of unchanged interest rate settings in the Philippines may result in PHP softness.
By contrast, we note Indonesian policymakers’ desire for a stable IDR and a strong public sector financial position. We are revising our PHP forecast profile lower. PHP FX has been a laggard within EM Asia FX for some time. To be sure, valuations are no longer the meaningful headwind for the currency they were in the 2015-16 period.
However, flow pressures are likely to remain challenging through the course of 2018. The current account balance continues to deteriorate, as domestic growth remains driven by import sensitive Capex for infrastructure-related investment.
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