Scotia Asian FX Strategy Update
2
Sacha Tihanyi Senior Currency Strategist +852 2861-4770 [email protected] GLOBAL FX STRATEGY Scoa Asian FX Update Thursday, September 11, 2014 EM FX AND USD/ASIA DIRECTION CONSISTENT WITH OUR VIEWS • Trading paerns and recoupling in EM currencies over the past few sessions is highly suggesve of what is to come. • Weaker Asian VX emanates from worries over hawkish shiſt in Fed guidance, and rising US rates volality. • We maintain our structural view for upwards pressure on USD/Asia, to be driven Despite the stabilizaon in USD strength today, the trading paerns of the past few sessions have been very suggesve of the key structural theme relevant for Asian FX that informs our longer term forecasts as we move further away from the summer and into the end of the year. Over the past four sessions we’ve see general EM FX under a reasonable amount of pressure, with EM vol finally picking up, though sll nowhere in line with the relave increase in G7 vol. EM Asian vol, typically a laggard compared to overall EM vol this year, has also made an equivalent move higher (see chart), in line with increased US rates volality, a key metric we have pointed out in the past as what to watch for an indicaon of a turn in the suppressed vol environment. A pickup in rates volality is reflecve of the ‘pricing-in’ of increased risk that the Fed is shiſting more hawkish, a key factor in our view on USD/Asia. Scanning key correlave metrics, besides US rates volality (which rates opon volality indices are showing a trend pickup), the EM currency complex that took it on the chin so heavily last year is also seeing significant pressure. ZAR and BRL are down over 2% in the past five sessions, while TRY has fallen 1.7%. Asia has fared beer but is sll showing tell-tale signs of pressure that global macro-financial condions are turning inhospitable. KRW and INR have shed nearly 1% over the same me period, and both of these currencies as well as IDR and PHP are showing daily trading paerns much like those in BRL, TRY and ZAR. This is consistent with our direconal view towards the end of the year. The driver of the move, which has come despite weaker US nonfarm data last week, remains concern over the potenal change in signals coming from the Federal Reserve. This has been driven by the San Francisco Fed paper we noted earlier this week, as well as a couple of stories in major financial press outlets that have suggested that the Fed is likely to alter its state- ment to provide greater guidance and clarity on Fed Funds. This is an element we had suggested in recent months that would be required, given the improved economic data and the complete lack of guidance provided by Chair Yellen at the Jackson Hole conference. Indeed if anything, Chair Yellen’s address increased uncertainty by suggesng that essenally every eco- nomic indicator is imperfect insofar as it informs potenal Fed policy decisions (there is truth to this of course). This increases the event risk at the upcoming FOMC meeng next week, though as with all market posioning on the pro- spect of increased risk, it also suggests that should the FOMC not put in place a significant change in messaging, markets could unwind current posioning on the assumpon that Chair Yellen’s and the more dovish members of the FOMC remain in control of general consensus. This looks less likely at the moment (thus market posioning is jusfied) as guidance will need to ghten up in the not too distance future, if not at the next meeng. While we may retrace to some degree the move of recent sessions, we are confident that the medium to longer term direconal risk implied by the moves is correct. 6.0 6.5 7.0 7.5 8.0 8.5 9.0 87.00 87.50 88.00 88.50 89.00 89.50 Jan-14 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Scotia USD/Asia ex-JPN Index EM Asia FX 1yr Vol Source: Bloomberg, Scoa FX Strategy EM FX VOLATILITY FINALLY KICKING OFF
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Scotia Asian FX Strategy Update
Transcript of Scotia Asian FX Strategy Update
Sacha Tihanyi Senior Currency Strategist +852 2861-4770 [email protected]
GLOBAL FX STRATEGY
Scotia Asian FX Update Thursday, September 11, 2014
EM FX AND USD/ASIA DIRECTION CONSISTENT WITH OUR VIEWS • Trading patterns and recoupling in EM currencies over the past few sessions is highly suggestive of what is to come. • Weaker Asian VX emanates from worries over hawkish shift in Fed guidance, and rising US rates volatility. • We maintain our structural view for upwards pressure on USD/Asia, to be driven Despite the stabilization in USD strength today, the trading patterns of the past few sessions have been very suggestive of the key structural theme relevant for Asian FX that informs our longer term forecasts as we move further away from the summer and into the end of the year. Over the past four sessions we’ve see general EM FX under a reasonable amount of pressure, with EM vol finally picking up, though still nowhere in line with the relative increase in G7 vol. EM Asian vol, typically a laggard compared to overall EM vol this year, has also made an equivalent move higher (see chart), in line with increased US rates volatility, a key metric we have pointed out in the past as what to watch for an indication of a turn in the suppressed vol environment. A pickup in rates volatility is reflective of the ‘pricing-in’ of increased risk that the Fed is shifting more hawkish, a key factor in our view on USD/Asia. Scanning key correlative metrics, besides US rates volatility (which rates option volatility indices are showing a trend pickup), the EM currency complex that took it on the chin so heavily last year is also seeing significant pressure. ZAR and BRL are down over 2% in the past five sessions, while TRY has fallen 1.7%. Asia has fared better but is still showing tell-tale signs of pressure that global macro-financial conditions are turning inhospitable. KRW and INR have shed nearly 1% over the same time period, and both of these currencies as well as IDR and PHP are showing daily trading patterns much like those in BRL, TRY and ZAR. This is consistent with our directional view towards the end of the year. The driver of the move, which has come despite weaker US nonfarm data last week, remains concern over the potential change in signals coming from the Federal Reserve. This has been driven by the San Francisco Fed paper we noted earlier this week, as well as a couple of stories in major financial press outlets that have suggested that the Fed is likely to alter its state-ment to provide greater guidance and clarity on Fed Funds. This is an element we had suggested in recent months that would be required, given the improved economic data and the complete lack of guidance provided by Chair Yellen at the Jackson Hole conference. Indeed if anything, Chair Yellen’s address increased uncertainty by suggesting that essentially every eco-nomic indicator is imperfect insofar as it informs potential Fed policy decisions (there is truth to this of course). This increases the event risk at the upcoming FOMC meeting next week, though as with all market positioning on the pro-spect of increased risk, it also suggests that should the FOMC not put in place a significant change in messaging, markets could unwind current positioning on the assumption that Chair Yellen’s and the more dovish members of the FOMC remain in control of general consensus. This looks less likely at the moment (thus market positioning is justified) as guidance will need to tighten up in the not too distance future, if not at the next meeting. While we may retrace to some degree the move of recent sessions, we are confident that the medium to longer term directional risk implied by the moves is correct.
6.0
6.5
7.0
7.5
8.0
8.5
9.0
87.00
87.50
88.00
88.50
89.00
89.50
Jan
-14
Jan
-14
Feb
-14
Ma
r-1
4
Ap
r-1
4
Ma
y-1
4
Jun
-14
Jul-
14
Au
g-1
4
Scotia USD/Asia ex-JPN Index
EM Asia FX 1yr Vol
Source: Bloomberg, Scotia FX Strategy
EM FX VOLATILITY FINALLY KICKING OFF
2
Global FX Strategy Thursday, September 11, 2014
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GLOBAL FX STRATEGY CONTACTS THE MAJORS & PRIMARY CURRENCIES Camilla Sutton CFA, CMT Chief Currency Strategist 416-866-5470 [email protected] Eric Theoret CFA, CMT Currency Strategist 416-863-7030 [email protected] LATAM CURRENCIES Eduardo Suarez Senior Currency Strategist 416-945-4538 [email protected] ASIAN CURRENCIES Sacha Tihanyi Senior Currency Strategist 852-6117-6070 [email protected]
Should you wish to be added to anyone of our three distribution lists, please reach out to one of the above authors.
