J.P. Morgan Remains Underweight Asia FX

J.P. Morgan update on Asia FX views below, higher energy costs help keep UW bias.

J.P. Morgan: "We are UW Asia FX, which remains a funder amid the energy driven sell-off. We retain a bias for carry and funding out of low-yielding energy importers, CNH, THB and KRW. We take profits on short CNHINR and long USDKRW, while holding on to short CNH vs basket, short THB (vs SGD) and SGD NEER (vs proxy basket).

Higher fixing and tariff news continued to weigh on the RMB:. Having been pegged at sub-7.10 levels since late March, CNY fixing finally crossed the 7.10 mark this week. While the move itself is not large, the direction of travel showcases that the PBoC is adjusting higher their line of defense amidst ongoing repricing in US rates and stronger moves in the dollar. This is largely consistent with our view that greater tolerance of FX weakness looks rather inevitable as the onshore Chinese community, policy makers included, adapt (slowly) to the idea of high-for-long. Meanwhile, new US tariffs on Chinese exports are rather immaterial for CNY FX, but it highlights risks of escalation in US-China tensions which could weigh on CNY FX in the coming months. China’s exports of steel and aluminum, ships and vessels included only account for less than 1% of total exports to the US. This means that the reported increase will not change the average tariff rate of Chinese exports to the US, a core input for our calculation of the tariff-neutral range of USD/CNY (currently at 6.95-7.20). However, political noise around US election will only increase US-China tensions, a backdrop that could keep the tariff fear in place for an extended period of time. Based on our tariff neutral framework, higher tariffs will correspond linearly to higher ranges in USD/CNH.

Central bankers strike back: Asia FX slowed its sell-off though the week, with policy makers across the region stepping up in a chorus of verbal intervention and smoothing efforts across the region. Still, some key technical levels have broken 1360 in USDKRW, 57 in USDPHP, 83.40 in USDINR, and - most critically - 7.10 in the USDCNY fixing. With global macro still skewing towards a stronger USD on firm US data, elevated energy prices, we think dips in the USD should be bought with some rate cut premia yet to be taken out of the curve. Gradual narrowing of geopolitically related risk premia continues, however, with energy a key driver for Asia FX right now. IDR and PHP the major underperformers this week, with carry trades under pressure globally as financial conditions tighten. "