Asia: More cautious on the rally in FX – Nomura

Research Team at Nomura, have become more cautious on the rally in Asia FX, given the increase in short USD/Asia FX positioning, increased noise against local FX strength and weaker-than expected China economic data for July, compounded by potential underpricing of a Trump presidency and Fed hike risks.

Key Quotes

“USD/Asia traded significantly (especially Northeast Asia FX) higher after New York Fed President William Dudley commented (16 August) that the fed funds futures market is underpricing rate hikes and a September rate hike is possible – we further shifted away from a short USD bias by reducing our short CNH vs. CFETS basket. Even with the July FOMC minutes (17 August) pointing to a divided FOMC on the timing of its next rate hike, the pullback in USD/Asia has been relatively contained. Heavy positioning could provide some support for USD/Asia, as our Asia FX positioning indices z-score has fallen to a year-to-date low of -0.47 standard deviations.

In Singapore, the market is increasingly concerned about whether current low oil prices, along with a weak perception of local banks’ asset quality, could trigger further credit events, after a Singapore-listed O&G services company filed a petition to liquidate itself on 27 July. This concern is further exacerbated by another Singapore listed O&G firm highlighting stress to its debt covenants due to persistently low energy prices (source: Bloomberg, 15 August). Along with the weak growth outlook, we maintain short S$NEER in our portfolio as potential for distress in the local debt market is another risk factor that should result in S$NEER underperformance.”