This week we examine local currency bank loan and deposit trends across the region. Similar to the deleveraging in external debt noted in last week’s focus, domestic loan growth has remained relatively weak, likely reflecting softer credit demand resulting from subdued economic growth and declining trade growth. Slower loan growth has kept loan-to-deposit (LDR) ratios broadly flat in the region ex. China and India.

In Asia, the declines in local currency deposits have stabilized somewhat as demand for FX deposits decreased and USD depreciation broadened in the first half of the year (see above diagram).

With the next Fed rate hike appearing imminent, USD has strengthened notably in recent weeks, which if sustained may limit local currency deposit growth and keep banking system liquidity tight in the region.

We advocate investors having neutral exposure to EM FX and refraining from large risk allocations heading into the US election. Our portfolio of trade recommendations should be well insulated in either scenario, focusing on a mixture of short and long USD trades and inter-EM relative value positive carry structures.

In Asia, we like short USDIDR and long USDTWD and relative value positive carry structures that include short MYRIDR, short SGDINR, and long INRKRW.

In China, we continue to recommend owning 1-year USDCNH seagull structures and shorting CNH against an abridged CFETS basket.

Apart from Asian pool, the favorite Trump hedge is to own a USDTRY 3.16 call with a KO at 3.41.