We continue to see rising Price pressure once the reflation theme resumes. Potential recovery of base metal prices and crude could nudge price pressures around the world higher.
Policy Normalization has gained momentum in the US as the Fed started hiking earlier this year (as opposed to Dec in 2015,2016) and there are already talks of balance sheet reduction.
We started the year with Political risks aplenty but the French elections have turned out favorably for the EU, polls for German elections seem to approve Merkel. While there is still the legislative election for France in June and other key political events such as Thailand’s General Election in mid-2018, China’s National Congress, Malaysia’s General Election to look forward to, political risks have somewhat receded to some extent and that has brought down volatility (VIX) to year lows, equities to record highs.
Asian currencies are likely to move at different speed with idiosyncratic drivers likely to create a Multi-Dimensional Asia: In Japan, the ultra-loose monetary policy will keep the USDJPY elevated beyond current levels, while in ASEAN, political risks in Thailand; deteriorating current account surplus in Philippines; expectations of a S&P sovereign credit rating upgrade in Indonesia; and stable oil prices and recent moves by the BNM in Malaysia.
Strategic Trade Ideas:
Buy EURJPY on receding political risks and to position for eventual monetary policy divergence
Buy USDSGD, USDJPY on sensitivity to UST yields rising
o Buy on dips towards 1.39, targeting a move towards 1.4200
o Buy on dips towards 111, targeting a move towards 116 and then 118
Favor long INR and THB against short JPY (Asian Central Bank RV Plays)
Short PHPINR on diverging current account balances
Long MYR (against SGD, JPY, THB, PHP) as MYR plays catch up relative to peers, fundamental valuation