Asia FX outlook 2018: Liquidity vs cyclical recovery - ANZ

Analysts at ANZ forecast further gains for Asian currencies in 2018, but the moves will be diffused across the region. 

Key Quotes

“A more positive global growth outlook and continued export momentum in the region, alongside the start of policy normalisation in some countries, are factors that will support Asian currencies.”

“There is no reason to fear further tightening by the US Federal Reserve. The region’s fundamentals are in a much better shape compared to the 2013 taper tantrum period, growth momentum is strong and monetary policy will see some recoupling with the US.”

“While we expect portfolio flows into the region to stay positive, the amount will likely moderate from this year’s levels. Global liquidity is set to ease next year, driven by a decline in major central bank balance sheets, wider credit spreads and an expected pick-up in volatility. We expect more volatile capital flows into the region.”

“Given the contrasting forces of easing global liquidity versus the cyclical growth recovery, we expect growth sensitive currencies to outperform, while high yielding currencies and those with external deficits can be expected to underperform.”

“Our top trades are to sell EUR/KRW, sell JPY/CNH, buy THB/PHP, and buy SGD/INR.”