Asia FX: Don’t Drive with Flat Tyres – Deutsche Bank
Research Team at Deutsche Bank, had held to their view that the recent risk rally was not to be chased in Asian FX as both wheels of the Asian growth cycle were slowly deflating, with the export cycle in deep negative territory and the credit cycle reaching its limit across the region.
“Despite the importance of capital flows, exports still matter greatly in explaining FX performance in Asia. Many asked if Asian exports might bounce on recent China stimulus, but the dual structural drag of rebalancing and vertical integration from China is hard to ignore.
Debt dynamics in China were of focus, with private-sector credit as a % GDP surpassing levels which has predicted global crises in the past. The scope for banking system stress in the region with rising LDRs, ever-greening of loans, and scope for greater recognition of NPLs cannot be overlooked. The simple implication from all this was that rates in Asia would remain low if not lower, and even if the Fed hikes gradually, narrowing rate differentials were set to be a bearish force for low-yielding Asian FX.
The notable exception was high-yielding IDR where rate cuts have fed a virtuous cycle of duration-seeking inflows and FX strength. Broadly speaking, in this USD cycle, the China-bloc of currencies (CNY, KRW) has moved the last and the least, supporting our view that they will be a crucial part of the final leg of USD strength.”
(Market News Provided by FXstreet)