EM Asia-Don’t lose the plot

EM Asia 

Reflationary trades have hit a speed bump. But while the latest headlines from the Foggy Dew are negatively impacting, the issue has more to do with the fact that the commodity-linked currencies failed to capitalise on the dovish Fed. At the same time, the confluence of political risk on both sides of the pond weighed and I suspect it is more to do with the recent commodity supply concerns stemming from the oil glut that has commodity traders parked temporarily in neutral.


In the meantime, Asia EM will be held ransom to the ebb and flow in risk appetite and overall commodity market conviction. But if we consider the softer outlook for the USD on the back of the dovish Fed hike, local EMs are unlikely to yield even more so that institutional and retail positioning isn’t especially thick, which suggests there will be no sudden rush for the exits due to overweight books.


We’ve witnessed moderate sell-off in KRW, INR suggests that both pairs will have a high beta correlation to the sell-off in global equities and should reap the rewards on the anticipated return of risk.


The MYR is in a similar position but as we near the apparent bottom of oil prices, I expect the Ringgit to be more sensitive to volatile oil prices.


The pullback in commodity prices was anticipated, as we all know nothing goes up forever, even more so if we consider over extended positioning in both Copper and Iron Ore. But the Trump reflationary trade is far KO’d. Oil prices could conceivably move lower, but given the hawkish rhetoric from OPEC and the anticipated bounce in global growth, vis a vis US tax and fiscal reform, it’s far too early to give up the plot. Don’t let this wave of risk-off muddy the big picture as commodity traders are likely waiting in earnest to fade any further capitulation. 


I still view the eventual move higher in US fixed income Yields as the most significant headwind for regional EM, and while US 10 year yields are expected to move higher throughout 2017, I suspect the undervalued regional equity markets and the higher yields on offer from local capital markets  will keep the regional currencies in check.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes