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.
“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)