“Asian central banks will be in Fed-watching mode and happy to let currency depreciation do the heavy lifting of policy easing, while saving their ammo on rate cuts.”
“China is now accepting a weakening of the RMB. The introduction of a trade-weighted basket has bought intellectual support for a loosening of the USD peg, by redefining what the Chinese authorities mean by the RMB being ‘basically stable’. As a base case, we would not be surprised to see onshore spot realizing what the CNH forwards are pricing in: around 6.80 on USDRMB by the end of 2016.”
“We do not expect most Asian central banks to stand in the way of currency depreciation. Some, such as the central banks of South Korea, Taiwan and Thailand, have scope to ease, but are likely to let currencies do much of the work in easing financial conditions. Others, like Indonesia and Malaysia would like to ease, but may not be able to, due to fear of exacerbating FX weakness. India may tilt towards another rate cut, under the heroic assumption that oil prices will remain low and the government is able to stick to fiscal consolidation (without being able to pass GST bill in parliament), and India gets a good monsoon. China appears most likely to cut rates, though this is at least partly already priced in by swaps.”
“So how would we position for next year?
• We are currently long the USD versus the TWD and short the SGD against the INR.
• We also like being short the MYR versus the IDR.
• We think the blow-out in USDPHP NDFs is creating an opportunity to buy the peso, though we are looking for the right levels to put on this trade.
• We are side lined on USDCNH at the moment though, once the RMB cheapens to a value of 100 against the CFETS basket, we may be tempted to try a contrarian long RMB position.”
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