Nothing's changed for Asia ex Japan currencies

Asian ex Japan currencies (AXJ) started to stabilize with the CNY in late August, and later on a more dovish FOMC statement on 17 Sep. The relief rally, however, did not turn up until October. The market only started to short-cover their bearish AXJ positions after US nonfarm payrolls fell below 150K for a second straight month. This affirmed the post-FOMC expectations for the Fed to delay its hike to 2016.  

The relief rally, unfortunately, did not last long either. By mid-October, focus started to return to monetary policy divergences again. Apart from the ECB warning of more QE, China surprised with a slew of monetary easing measures on 26 Oct. Earlier on 14 Sep, Singapore flattened its appreciating SGD policy band to near-neutral, as its economy narrowly averted a technical recession. Taiwan joined the region's easing cycle on 24 Sep, while India surprised with a larger-than-expected 50bps cut on 29 Sep. 

Stepping back, nothing has really changed. The region's worst performer this year, the Malaysian ringgit, was quick to depreciate again after the FOMC statement on 28 Oct played down the Fed's dovishness. The outlook for a higher USD in the region was still reflected by the high correlation between SGD interest rates and USD/SGD, and more importantly, SGD rates staying above their US counterparts.

The CNY's appreciation in Sep-Oct was viewed as part of China's last push to get its currency into the SDR. Measured against China's "new normal" economy, the CNY is considered overvalued on a REER basis. Not surprisingly, the US Treasury Department stopped referring the CNY as "significantly undervalued" in its latest currency report.

Despite an impressive recovery in the Indonesian rupiah, Indonesian stocks still face downside risks from weak exports. The Philippine peso could also surprise on the downside if the slower growth/inflation lead markets to abandon their rate hike expectations in favor of a cut. 

New Zealand is clearest in wanting more currency depreciation. The central bank specifically cited 65 as the medium-term target for its trade-weighted index (TWI). Based on the past year's correlation, NZD/USD has scope to fall below 0.60. As for Korea, it is increasingly worried about losing price competitiveness from the sharp depreciation in its major trading partners, especially in the largest economies.