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.
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