Prime Trade Ideas: Asian FX to Bounce Back on Rebounding Economy

We consolidate our favourite biases into one, easy-to-read, weekly report! Please find the original pieces linked throughout and a summary table at the end of the document. Reach out to us on Slack or email the author with any questions about the content. 

Latest Updates 

FX, Rates, and Commodities: 

• USD rally looks exhausted (5 October, Richard Jones) 
• Asian FX to bounce back (3 October, Macro Hive, SGX) 
• Stagflation ahead? (5 October, Dominique Dwor-Frecaut) 

• Expect higher US bond yields! (12 October, Dominique Dwor-Frecaut) 

Equities and Credit: 

• Going overweight consumer staples (9 October, John Tierney) 
• Will investors keep losing appetite for consumer staples stocks? (6 September, John Tierney) 

Momentum Models: 

• Models are now bearish on UK rates (12 October, Bilal Hafeez) 

Asset Allocation: 

• Bilal recently gave an interview with Bloomberg TV where he discussed his latest asset allocation views. See the video here.  

Bilal’s Asset Allocation 

Find Bilal’s latest asset allocation biases here.  

• Our views on the major asset classes remain the same. We’re slightly more positive on the FTSE 100 given this environment of rising rates at the long end. The UK market remains cheap and has the lowest sensitivity to higher rates. Also, the FTSE 100 is dominated by global firms, so the domestic weakness in the UK is unlikely to be a big headwind.  

FX, Rates, and Commodities 

G10 FX 

Impressive USD Rally Shows First Signs of Fatigue. You can read the entire piece here. 

The USD continued its seemingly interminable rise, with the USD Index (DXY) rising ~0.4% last week and looking poised for a 12th straight week of gains before reversing lower. Despite this impressive performance since mid-July, price action in recent days in both EUR/USD and USD/JPY has revealed slowing momentum in the USD rally.   

This pause may yet prove only a temporary respite for EUR/USD. However, the longer the pair lingers above the YTD low without any follow-through, the more likely we see a more meaningful bounce towards 1.10.  

The longer EUR/USD remains near 1.05 without a convincing downside follow-through, the more likely the dollar is to reverse and EUR/USD trade higher.   

Commodities 

As expected, Brent has moved down below $90 driven by an unwind in bullish positioning and fears around weak gasoline demand. In the near term, the developments in the Middle East will determine the outlook for crude. If we see signs of a broader escalation, that could ensure a risk premium remains. However, without this, we should see oil correct lower. Beyond this, tight supply should see Brent head back towards $90/ bbl.  

Macro Hive Collaborations 

SGX: Are Asian Currencies Bottoming? You can read the entire piece here. 

In our latest collaboration with SGX, we look at the various signs of a bottom in both Asian FX and Asian economies.    

The manufacturing recession is ending. Chinese growth is stabilizing. Asian exports are bottoming. These are all tentative, but meaningful, indicators of progress. Asian central banks are in watch-and-wait mode. None seem likely to make the mistake of cutting prematurely. But further US hikes remain a risk. 

Asian currencies were resilient to rising US real rates in September. Similarly, large equity outflows are only marginally impacting FX. This suggests Asian FX could be bottoming. 

Equities and Credit 

Equities 

We remain neutral on the S&P 500 but are no longer underweight homebuilders. The sector has corrected and now trades at the average P/B over the last 10 years.  

Will Investors Keep Losing Appetite for Consumer Staples Stocks? You can read the entire piece here. 

The consumer staples sector has underperformed the broader market by more than three points in recent months. One big change is apparently growing appetite for appetite suppression drugs, which seems to be hitting food sales. 

PepsiCo (PEP) and Coca-Cola (KO) stocks are down about 5% this week on concerns that these drugs will hit salty snack and calorific soft drink sales. 

We like to be tactically overweight in the consumer staples ETF XLP and PEP/KO. 

Credit 

There are no changes to our credit view since last month. 

Momentum Models 

Our momentum models cover FX, equities and rates. The basic strategy is to use returns (lookback windows) to give buy/sell signals. You can find the latest report here. Find out how to enhance your portfolio using momentum models here. 

Momentum models are now bearish on UK rates. However, Henry sees value in being long the front end of the UK curve. They remain bullish on USD but have tamed somewhat, in line with our expectation that the USD rally has tired. 

Central Bank Monitors and Previews 

Fed: 

Stagflation Ahead? You can read the entire piece here. 

The 2021-22 oil price shock is an outlier as it led to a spike in core inflation but not a recession. This reflects a recovery in workers’ bargaining power together with belated and limited policy tightening. 

Stagflation would be a risk if the Federal Reserve (Fed) got serious about returning inflation to target as it would require a recession, which would take time to lower inflation. This is unlikely anytime soon as inflation is not contentious enough yet for the Fed to find the political will to tip the economy into recession. 

Dominique expects the strong growth and high but stable inflation macro backdrop to continue and provide the basis for stock and bond market stabilisations. 

Adieu QE, Hello Higher Yields. You can read the entire piece here. 

Long-term yields, a proxy for the cost of capital, tend to track GDP growth, a proxy for the rate of return on capital: the US has gone through sustained periods of higher yields with higher growth than currently. While the US is more leveraged now than during the era of high yields, strong private sector balance sheets and the dollar’s global status suggest the US economy can withstand higher long-term yields. 

The relationship between long-term yields and GDP growth suggests yields have more upside. A trigger for a renewed bond selloff could be the Fed signalling that the extra 2023 hike is still likely at its December meeting. 

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Photo Credit: depositphotos.com

(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.)