FxWirePro: Quest in risk-on dynamics - CNH and other Asian low yielders in EMFX radar

The strategy for trading EMFX encompasses a mixed bag. It is generally pro-risk through exposure to high yielders but with a modest long dollar bias by shorting low yielders that offer little value either from a carry or fundamental perspective (complete list of trade ideas in Trade Monitor). This balanced approach remains prudent.

China: January FX reserves fell a touch below US$3 trillion. China’s FX reserves declined by US$12.3 billion in January to$2.998 trillion, a touch below the psychologically sensitive US$3 trillion threshold to mark the lowest level since February 2011, down from aUS$3.993 trillion peak in June 2014.

While January trade report points to benign near-term exports trend.

Taiwan trade activity eased in January, partly on seasonal factors.

Risk on price action in EM FX overnight; for now (and absent a catalyst), it is hard to fight the trend, especially in high yielding space. It seems like any risk premium related to Trump is evaporating and there is no longer any concern about the Fed, Chinese growth, or CNY.

Reduction in risk premium is being supported by improving fundamentals – growth dynamics improving across an EM aggregate and return on assets perking up from the mid-2016 low.

While South Korean Housing market indicators softened.

Household lending likely accelerated further in Q4’16.

Next week: Trade prices and unemployment rate.

Trade recommendations:

The long dollar risk is selective and focused on low yielders (except CNH) and mostly via options.

Long USDKRW via 1x2 call spread: Good entry point with 61.8% retracement level from the September low to December high coming in around 1136. 1x2 structure improves max leverage to 9 times from 3 times in a 1x1.

Long USDSGD: via a one-touch: Worried about French elections and EUR parity? SGD 3m implied vol about 40% cheaper than EUR vol.

Long USDCNH via a 1yr seagull: Expensive to bet against the CNH. Seagull provides upside exposure that is cheapened significantly by selling expensive 1-year vol.

Long USDTWD: Tactical position to fade YTD strength in TWD; could face more formidable support above the May 2015 low (30.39).