EFTA01475276.pdf

Asia FX: Positing on positioning The sharp rebound in Asian currencies in recent days can trace its roots to three drivers: 1) market re-pricing of the Fed after the weak NFP; 2) a more benign view of CNY ahead of the SDR review, and given better China reserves data, and stronger fixings; 3) stretched long USD/Asia positioning. In this note, we take stock of a range of positioning metrics to gauge how far the unwind has run. • Long USD/Asia NDF positioning has largely been cleaned out. The average 3M NDF-onshore forward implied yield spread in Asia has fallen sharply. The spread is now near negative extremes that have held since the 2011 EM sell-off (Chart 1). This suggests offshore investors have rapidly unwound long USD asset hedges or speculative positions. For five pairs (MYR, PHP, IDR, KRW, TWD) the offshore-onshore yield spread is at or near the lowest level over the past year (Chart 2). The front ends of the USD/MYR and TWD NDF curves are trading below spot. • KRW and IDR are now trading stronger than pre-CNY deval levels (Chart 3). PHP and THB have retraced all their losses since the China deval. MYR stands out as still trading 5% weaker versus then • On average, ATM vol curves remain very flat (Chart 4) although this masks intraregional divergence. Vol curves are still inverted in MYR, IDR, TWD, and SGD (Chart 5). In MYR and IDR this captures very high realized volatility, with gamma still valuable given sharp moves in both directions. For TWD, this is likely a reflection of the unwind of structured supply in the front end, while for SGD this could capture the premium on the MAS event. Other vol curves have been normalizing, namely the CNY and CNH curves as the market is increasingly convinced of the "stable-until-SDR-review" thesis, and is encouraged by official rhetoric, USD supply, and lower fixings. The scope for further vol normalization appears greater than in outrights. • Risk reversals have begun to retrace lower, but remain relatively elevated versus lighter NDF positioning (Chart 6). Even after today's move lower in riskies, the majority of 3M riskies remain above the 70th percentile of the past year (Chart 7). Front-end risk reversals have come off much more than the back end (Chart 8), suggesting the market continues to seek protection for the more medium term. • Currencies appear to have priced in the end of equity outflows for now (Chart 9). Recall that equity outflows were a much bigger driver of Asian FX weakness over the summer than bond outflows (this was a 'growth tantrum' more than a 'taper tantrum'). The relationship between average FX returns and equity inflows for the six markets that report daily data (KRW, TWD, INR, IDR, THB, PHP) has been exceptionally tight for years. The 3m rolling sum of equity flows had reached cyclical lows by end-September. The recent surge in currencies suggests the FX market is now pricing equity flows to flatten out. Indeed, October has seen small inflows across markets (Chart 10). Whether Asian FX gains can extend will depend EFTA01475276 on whether equity inflows return in size. This material has been prepared by the Research Department of Deutsche Bank AG, London Branch. It is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. The views expressed above accurately reflect the personal views of the authors. The authors have not and will not receive any compensation for providing a specific recommendation or view. Investors should consider this report as only a single factor in making their investment decision. For other important disclosures please visit https://gm.db.com/ under the "Disclosures Lookup" and "Legal" tabs MCI (P) 124/04/2015. Date 12 Oct 2015 Mallika Sachdeva FX Strategist +65 6423 8947 [email protected] EFTA01475277 • Most currencies have tracked equity markets tightly in this rebound. Based on simple level correlations between FX and local stocks (Charts 11-16), INR, THB and KRW are trading fair to equities, IDR has overshot and now looks rich versus the JCI, as does PHP, slightly. TWD still looks cheap versus local stocks. • Regressions of FX against key financial variables suggest IDR and KRW now look rich to underlying asset market drivers (Chart 17). Indeed, both may soon encounter official bids, with IDR trading near the bottom of the 13300-13700 range identified by BI as fair value. PHP, SGD, TWD and CNY are within 1% of fitted fair value based on our regression. INR, MYR and THB could be considered cheap on this metric. We have been constructive on INR, had turned neutral on the THB, but have believed there are idiosyncratic reasons why MYR should remain cheap (political risk premium, reserve rebuilding, limited policy space). Offshore-onshore implied yield spreads (Chart 1 and 2) -4% -3% -2% -1% 0% 1% 2% 3% 4% 3m NDF-Onshore Forward Implied Yield Spread Offshore too negative Offshore too positive 2010 -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% CNY THB Source: Bloomberg Finance LP INR 2011 2012 2013 2014 2015 Offshore-Onshore Spread (%) 1Y Percentile (%) (RHS) 100 10 EFTA01475278 20 30 40 50 60 70 80 90 0 TWD KRW IDR PHP MYR EFTA01475279 Retracement since CNY deval (Chart 3) -15% -13% -11% -9% -7% -5% -3% -1% 1% 3% Difference versus 10-August (day before CNY devaluation) 0% -2% -5% Current Max Drawdown -2% -1% -1% 0% 2% 1% MYR TWD CNY INR SGD THB ATM Vol curve (Chart 4 and 5) 10 11 5 6 7 8 9 Jan-15 -5.00 -4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 Apr-15 Jul-15 Vol Slope (ranked by 1Y percentile) Current 1Y Percentile Oct-15 Percentile --> 0 means vol slope flattest or most inverted over past year EFTA01475280 MYR IDR SGD TWD THB CNH INR KRW PHP CNY Source: Bloomberg Finance LP 0.00 0.20 0.40 0.60 0.80 1.00 1.20 Average Asia 1M ATM Vols Average Asia 1Y ATM Vols PHP IDR KRW EFTA01475281 Risk reversals (Chart 6-8) 3.5% Average Offshore-Onshore 3M NDF Yield Spread Average 3M Risk Reversal, RHS 2.5% 1.5% 0.5% -0.5% -1.5% Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 1.20 1.40 1.60 1.80 2.00 2.20 2.40 2.60 2.80 4.5 3.5 4 2.5 3 1.5 2 0.5 1 0 IDR MYR CNY THB CNH TWD PHP SGD INR KRW 3M Risk Reversal (ranked by 1Y percentile) 3M Risk Reversal 1Y Percentile, RHS 100 10 20 30 40 50 60 70 80 90 0 0.5 1.0 1.5 EFTA01475282 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Average Asia 1M 25D Risk Reversal Average Asia 1Y 25D Risk Reversal Jan-15 Apr-15 Source: Bloomberg Finance LP Jul-15 Oct-15 EFTA01475283 Equity flows (Chart 9-10) KRW -8 -7 -6 -5 -4 -3 -2 -1 0 1 0.4 TWD 0.3 THB 0.2 INR 0.2 0.0 -1.3 -2.6 -3.1 Q3 (July-Sep) Oct MTD -6.9 -2.6 -1.2 PHP IDR 0.2 Source: Bloomberg Finance LP EFTA01475284 Local stock market levels (Chart 11-16) 5600 JCI Index USD/IDR, RHS 5200 4800 4400 12,200 12,700 13,200 13,700 14,200 14,700 4000 Jan-15 Apr-15 Jul-15 Oct-15 24500 25500 26500 27500 28500 29500 Jan-15 8,200 Apr-15 SENSEX USD/INR, RHS 61 62 63 64 65 66 67 68 Jul-15 Oct-15 PCOMP Index USD/PHP, RHS 7,800 7,400 7,000 6,600 Jan-15 Apr-15 Source: Bloomberg Finance LP Jul-15 Oct-15 44 EFTA01475285 44 45 45 46 46 47 47 48 EFTA01475286  10,000 7,000 7,500 8,000 8,500 9,000 9,500 Jan-15 1,650 SET USD/THB, RHS 1,550 Apr-15 Jul-15 TWSE USD/TWD, RHS 30 31 31 32 32 33 33 34 34 Oct-15 1,450 1,350 32 33 34 35 36 37 38 1,250 Jan-15 2,200 Apr-15 Jul-15 Oct-15 KOSPI USD/KRW, RHS 2,100 2,000 1,900 1,050 1,070 1,090 1,110 1,130 EFTA01475287 1,150 1,170 1,190 1,210 1,230 1,800 Jan-15 Apr-15 Source: Bloomberg Finance LP Jul-15 Oct-15 EFTA01475288 Regression based fair value (Chart 17) -4% -3% -2% -1% 0% 1% 2% 3% Rich/Cheap (+/-) Percentage deviation of current spot from fitted value based on a 3-year regression of the currency against local equities, local 10Y bonds, S&P, 10Y USTs, USD TWI, Oil and Sovereign CDS (where available) IDR KRW PHP TWD CNY SGD INR MYR THB Source: Bloomberg Finance LP EFTA01475289