ASIA FX: Goldman Sachs On Asia FX Outlook

The US bank upgrades its USD forecasts against Asia FX. It goes short THB/KRW tactically as well. See below for more details. 

Goldman Sachs: EM Asia: Forecast adjustments. To account for the passage of time, recent Dollar strengthening and our broader Dollar forecast revisions, we refresh a number of our EM Asia FX forecasts. We continue to expect USD/Asia to trend higher supported by new trade protectionist measures, continued US exceptionalism and still positive USD versus Asia rate differentials through the end of the easing cycle. Our baseline scenario is that 20% tariffs on Chinese imports to occur early in Trump’s second term. Accordingly, we expect the sharpest move in USD/CNY and other USD/Asia pairs to be front-loaded. We maintain our forecast for USD/CNY at 7.40/7.50/7.50 over the next 3m/6m/12m. As outlined previously, we think Chinese policy makers will allow the currency to adjust, but the sharpest move is likely to come after the actual measures have been announced and not in the run-up, similar to the 2018-2019 episode. One key change in view is that previously we had highlighted that the USD/KRW would likely be the most vulnerable pair to a stronger USD and heightened trade tensions. Indeed, the KRW did underperform Asian FX in December, mostly driven by idiosyncratic factors around the politics. However, given the size of the move and likely policy response from the authorities, we think there is scope for a relief rally in the KRW and thus shift our USD/KRW forecasts lower in the near-term to 1440/1460/1460 on a 3m/6m/12m horizon. Moreover, we initiated a trade recommendation to go tactically short THB/KRW, as we also expect a reversal of the Baht’s recent outperformance. Amongst the low-yield markets we expect THB to underperform MYR, SGD and TWD. Amongst the high-yield markets, we expect INR to outperform while the IDR should underperform.