The USD has caught a bid in late Asian trading as markets digested commodities, Asia long-term economic outlook in light of falling local entrepreneurial returns and ambitious corporate balance sheets, and interest rate differentials widening further in favour of the USD. GBP and JPY shorts are best suited for an environment where equity markets are not yet showing signs of immediate stress, cross currency basis swaps coming in, UK politics staying volatile and the terrorist attack in Brussels raising questions concerning the ‘Schengen’ set up. Philippine exports and imports showing a historically impressive monthly recovery adds to our impression that local Asian economies have entered the year in better shape helped by China’s expansionary fiscal and monetary policy. However, the region shows leverage expanding faster than output, suggesting the debt funded recovery may not have many legs to run from here. USDKRW trying to break towards new cycle lows within the early part of the Asian session has strongly rebounded. This sort of trading behaviour is typical for a market finally clearing out its USD over-positioning witnessed in January.
The old versus the new USD. We remain USD bullish, but highlight that the anticipated USD bull-run may look different to the USD advance setting in after the October downside correction. In mid-October it was sharply weakening Asian growth data and China reporting increasing capital outflows pressures pushing the USD primarily higher against EM. Falling commodity prices added momentum to the trend. Nowadays, the USD should find a bid via rising interest rate and yield differentials suggesting low yielding DM currencies coming under selling pressure. Chicago FED Evans was less dovish than expected when saying his outlook is consistent with two more hikes this year. Phili Fed Harker (non-voter) sees a strong case for the Fed hiking rates.