Regional FX & Fixed Income Strategy

  • We have closed out of our bullish New Zealand 10-year bond view at a gain of 18bps. While we still see yields falling over the medium term, the short-term picture is less clear.

  • We expect Australia's 2s-10s government bond curve to flatten over the coming weeks and months as the 2-year remains stable while expectations of a protracted deleveraging cycle put downward pressure on 10-year yields.

  • We are bearish 10-Year Japanese Government Bonds (JGBs). While we are down 2bps at present, we believe that the inflationist policies of the Abe administration bode ill for the country's bond markets over the medium term.

  • We are no longer bullish towards local debt as recent gains have met our expectations and markets such as Indonesia are beginning to look overbought.

Our decision to turn cautious towards Asian FX on October 30 proved well-timed, with the US dollar coming back strongly across the board. Looking at our Asia FX basket (which excludes AUD and NZD), further weakness looks likely over the near term. That said, we expect the low that was hit in late-August to hold firm as valuations remain favourable, the long-term economic outlook for the region is relatively bright, and most countries in the region have external surpluses.

For this reason, we remain bullish on Asia FX versus the New Zealand dollar. New Zealand is very expensive on every valuation metric, has a large net international investment deficit, and faces an extended period of weak growth as the economy deleverages. These factors should see the NZD perform very poorly over the medium term. In the short-term, meanwhile, the currency has failed to break above the US$0.8500/US$ level and looks to be forming a topping pattern. We are up 0.7% on out bullish Asia FX versus NZD view, and we expect to see double-digit gains over a multi-month period.

Greenback Comeback
Asia - BMI Asia FX Basket

Regional FX & Fixed Income Strategy

  • We have closed out of our bullish New Zealand 10-year bond view at a gain of 18bps. While we still see yields falling over the medium term, the short-term picture is less clear.

  • We expect Australia's 2s-10s government bond curve to flatten over the coming weeks and months as the 2-year remains stable while expectations of a protracted deleveraging cycle put downward pressure on 10-year yields.

  • We are bearish 10-Year Japanese Government Bonds (JGBs). While we are down 2bps at present, we believe that the inflationist policies of the Abe administration bode ill for the country's bond markets over the medium term.

  • We are no longer bullish towards local debt as recent gains have met our expectations and markets such as Indonesia are beginning to look overbought.

Our decision to turn cautious towards Asian FX on October 30 proved well-timed, with the US dollar coming back strongly across the board. Looking at our Asia FX basket (which excludes AUD and NZD), further weakness looks likely over the near term. That said, we expect the low that was hit in late-August to hold firm as valuations remain favourable, the long-term economic outlook for the region is relatively bright, and most countries in the region have external surpluses.

Greenback Comeback
Asia - BMI Asia FX Basket

For this reason, we remain bullish on Asia FX versus the New Zealand dollar. New Zealand is very expensive on every valuation metric, has a large net international investment deficit, and faces an extended period of weak growth as the economy deleverages. These factors should see the NZD perform very poorly over the medium term. In the short-term, meanwhile, the currency has failed to break above the US$0.8500/US$ level and looks to be forming a topping pattern. We are up 0.7% on out bullish Asia FX versus NZD view, and we expect to see double-digit gains over a multi-month period.

Major Downside Potential
New Zealand - Exchange Rate, US$/NZD
ASIA ASSET CLASS STRATEGY
ENTRY DATE ENTRY LEVEL % GAIN/LOSS RATIONALE
FOREIGN EXCHANGE
BULLISH ASIA FX BASKET VERSUS NZD 14-Oct-13 0.8143 0.7% Asian FX is undervalued on the whole and fundamentals are improving, while the NZD is extremely overvalued and faces risks from a widening trade deficit
FIXED INCOME
BEARISH JAPAN 10-YEAR BOND 06-Mar-13 64 -4bps A bubble increasingly at risk of bursting as a result of BoJ policies
BULLISH AUSTRALIA 10-YEAR VERSUS 2-YEAR BONDS 30-Sep-13 135 -2bps While the downside for 2-year yields has diminished, there is significant room for long-end rates to fall
EQUITY INDICES
BULLISH SRI LANKAN FINANCIALS 17-Oct-13 12,948 -0.4% Monetary easing and recovering export cycle to boost financials
MACRO-INDUSTRY STRATEGY
N/A
*As of November 4, 2013. Asia FX basket is an evenly-weighted basket of CNY, IDR, INR, JPY, KRW, MYR, PHP, SGD, THB, TWD. Source: BMI, Bloomberg
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