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The Fed cycle could prove particularly stressful for Asian EM this time around if US rates were to rise whilst Asian export growth were contracting as a consequence of the slowdown in China. Asian currencies risk has been falling into the gap between the US and Chinese business cycles.
With advanced core rates emphasizing EM vulnerabilities, we have been recommending bearish EM FX trades.
Currency updates:
Asia will also enter the Fed liftoff period with pricing and ownership back near pre-taper-tantrum levels.
Half of EM Asia FX is now stronger than pre-taper in NEER terms (CNY, KRW, TWD, PHP, SGD) with only IDR more than 10% weaker.
Meanwhile, foreign ownership ratios in bond markets are almost as high (MYR, THB) if not higher (IDR) than pre-taper. Foreign equity ownership has also substantially grown in INR, TWD and KRW.
Why Asian currency baskets have been vulnerable?
- The slowdown in the Asian export cycle
- Slowdown and potential reversal of sizeable equity inflows
- Re-pricing of the Fed as September lift-off approaches which could give a boost to yield seeking deposit outflows.
