BofA on Asia FX - Carry Headwinds Persist

BofA notes carry headwinds persist for Asian FX, with the market likely to wait for a firmer risk on backdrop, coupled with equity inflows before turning more constructive on the outlook....

"The sharp increase in implied volatility in US rates did not filter into the FX space, and USD-Asia has remained remarkably stable throughout the latest episode of the banking sector risk in the US and Europe. The current shape of the US curve is pricing in for aggressive Fed cuts in 2H23, resulting in US rates outperforming Asian rates on a forward basis, but a number of Asia curves posted similar performance as the US on a spot basis. With the Fed funds rates still much higher than most regional policy rates, across Asia, most forward points for most currencies remain deep and negative. We believe the market currently lacks incentives to sell USD given the steep carry cost, and will only sell USD once there are clear signals for a risk-on environment supported by equities inflow. In 2H23, we prefer to sell USD against KRW and THB because of our 2023 FX forecast and a relatively low negative carry-to-realized volatility ratio."