JPY: Asia Bears Need Abe Too – Deutsche Bank
Mallika Sachdeva, Strategist at Deutsche Bank, suggests that the Asian
FX gains have been attributed to a mix of seasonality, covering of
offshore under-weights on Asian equities, unwind of speculative long USD
positions, and reprieve from a dovish Fed.
Key Quotes
“What
should not be overlooked is the likely role played by JPY strength.
While the USD/JPY unwind has led to questions about policy
effectiveness, it has also helped stabilize China’s FX boat. The FX
dynamics in Asia’s two largest economies have (unhappily for Japan) been
working together to create an environment for Asian FX recovery.
Many
intuitively regard JPY strength as a “risk-off” phenomenon associated
with weaker equities and weaker Asian FX. While negative correlations
may work in the short-term, they tend not to hold over longer periods.
In the Abenomics years, JPY-Asia FX correlations have picked up around
large moves in USD/JPY and have generally been positive.
After
BoJ QE1, North Asian correlations went quickly positive with USD/KRW,
TWD and SGD moving higher with USD/JPY on competitiveness fears. ASEAN
correlations turned negative at first as currencies strengthened on
carry-seeking flows, but this was short-lived. Around BoJ QE2, USD
strength was more uniform, with North Asian correlations still
relatively higher. We are again seeing Asian FX correlations to the JPY
turn positive, but this time in the direction of strength.
Aside
from the potential relief for export competitors like Korea, the
biggest advantage of JPY strength has been felt by China. Note that JPY
is the third largest weight in China’s CFETS basket. USD weakness versus
JPY (and EUR) has helped China enjoy the best of both worlds: creeping
CNY basket weakness with USD/CNY stability.
With the market
drawing greater solace from the latter, Asian FX has benefited. The
market may not overlook CNY basket weakness forever: the DB proxy for
the CNY basket has weakened by 3.5% YTD and is nearing 97. If the market
questions PBOC’s commitment to “basket stability” this could shake
Asian currencies, but we are not there yet.
Zooming out, Asian
FX has tracked JPYCNY closely with a lag in recent years. Current JPYCNY
levels – if maintained – are consistent with more gains in Asian FX.
Asia bears should be hoping for a revival of Abenomics.”
(Market News Provided by FXstreet)
