Markets are starting to come to terms with a COVID world and Asia FX is no different. After tumbling in March, most Asia FX stabilised over the last month (Chart 1). INR has strengthened against the dollar, SGD and TWD are flat, while CNH and KRW are down. The strength in INR is notable as it comes in the face of a generally strong dollar – the DXY is up over the past month.
DXY and Global Equities Still an Important Driver of Asia FX
That said, most Asia FX is still correlating strongly with broader equity and dollar trends. So, understanding that backdrop is key. The picture is unclear on the dollar as the Fed remains extremely dovish, but investors are finding it a safe haven in an uncertain world.
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Markets are starting to come to terms with a COVID world and Asia FX is no different. After tumbling in March, most Asia FX stabilised over the last month (Chart 1). INR has strengthened against the dollar, SGD and TWD are flat, while CNH and KRW are down. The strength in INR is notable as it comes in the face of a generally strong dollar – the DXY is up over the past month.
DXY and Global Equities Still an Important Driver of Asia FX
That said, most Asia FX is still correlating strongly with broader equity and dollar trends. So, understanding that backdrop is key. The picture is unclear on the dollar as the Fed remains extremely dovish, but investors are finding it a safe haven in an uncertain world. Meanwhile, equities have defied weak economic data and poor earnings in anticipation of a post-lockdown bounce in the economy. The question is how long the equity rally can last without validation from the data. The global backdrop, therefore, remains uncertain for Asia FX.
Best Opportunities are in CNH, INR and TWD
What does this mean for Asia FX? We think the dollar’s longer-term trend is down, which should see USD/CNH lower. It helps that China is the most advanced in containing COVID. The stability in INR in the face of its harsh lockdown suggests earlier INR weakness had already priced the negative consequences of COVID. Meanwhile, TWD has been stable throughout, which could imply much of the good news has been priced. We would therefore expect INR to outperform TWD, especially when taking carry into account (Chart 2). As for KRW and SGD, both are likely to be most influenced by the global backdrop – the former by equities and the latter by DXY.
Chart 1: Asia FX vs USD Changes
Chart 2: Asia FX Carry vs USD
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)