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Taiwanese currency appears to be rate sensitive: The sentiment toward EM currencies could be in the process of shifting and we prefer to focus on regional low yielders in expressing a bullish dollar view. The slew of hawkish commentary from Fed officials in recent weeks as put the possibility of a rate hike back in play for H2.
Chinese growth should be biased to downward surprises as the year progresses. Markets have been complacent to these growing risks and short dollar positioning could start to shift to a more neutral exposure.
In Asia, long USDTWD looks appealing on both the Fed and China angles. The TWD is a rate-sensitive currency given the dominance of local life insurance companies in deciding to allocate to local or foreign bonds.
Trade tips: Long USDTWD 3m NDF at 31.360 (spot ref: 31.372) with a stop at 30.55 (-2.50%) and a target at 33.25 (+5.2%), thereby, we can achieve decent risk reward ratio. The position entails positive carry of 14bp/month.
We encourage USDTWD longs given:
The dislocation between spot and interests rate differentials in recent months
The likelihood that the rate differential will move further in favour of USD upside (Fed tightening and CBC easing)
Negative forward points offer a positive carry structure to get long dollars and
Technicals indicate a recovery from stretched positioning and hedging by onshore lifers is an unquantifiable risk. The next hurdle will be closing above the 100d moving average (32.08).
Taiwan is also the most impacted country from China’s growth slowdown (direct and re-exports to China is the highest in EM). While a repeat of the stresses experienced in 2015 are unlikely (investors are better conditioned to the known risks), risk-reward is starting to favour long dollar positions to fade the EM rally.
