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The broader backdrop for Asian currencies remains quite a defensive one: The weakness of CNY looks unstoppable. While the Chinese central bank keeps adding the so-called "counter-cyclical factor" (with an intention to stabilize the Chinese currency) into USDCNY fixing over the most of time after the 7 hurdle was breached, there has been little sign of CNY stabilization in sight. USDCNY is approaching 7.10 this morning, which is the highest level in more than one decade. In the meantime, the CNY is also clearly an under-performer in Asia, with its official index with a reference to a basket of currencies hitting the lowest since this index was introduced in 2015.
The rapid escalation in the US-China trade conflict; the break of 7.00 in USDCNY; risks around further policy easing within the region and likely less impetus from additional Fed easing.
KRW and TWD: USDKRW remains a buy on dips given cyclical headwinds and being in the crosshairs of the trade conflict. Equity outflow momentum can still weigh on the currency. However, we are close to previous cyclical highs in USDKRW and late this week there has been some softening in the trade spat with Japan. So risk/reward around current levels for fresh longs may be questionable.
We are exiting out of USDTWD 3 month 31.60/32.00 call spread. This option was due to expire in the middle of August. Our bias remains to play USDTWD from the long side but clear levels and entry points are critical. Lower commodity prices are likely to reduce imported inflation pressures further, which should drive an easier policy bias from the CBC and ultimately a weaker TWD.
We maintain underweight as per the JP Morgan’s GBI-EM model portfolio and entered into a short CNH position against USD and JPY via the 6-month forwards. Meanwhile, we exit the USDTWD call spread position but retain a buy on dips bias. Courtesy: JPM & Commerzbank