Summary:
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
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