- Asia FX in a range: NT negative headwinds are offset by other (4) factors — "With market/Asian CBs adjusting for slower growth momentum, and no real catalyst to reverse sentiment, we think near-term (NT) headwinds for Asian FX will remain high. However, the presence of medium-term support factors should help provide offsetting bids to Asia FX, translating to more meaningful appreciation once double-dip fears ease and risk stabilizes."
- No 1#: Asia’s strong public finances support debt-related capital inflows —
"Inflows into Asian credits and LC bonds have been very resilient despite periods of risk aversion, and these trends should continue. Asia’s fiscal and external liquidity trends should remain relatively solid, prompting more upward ratings momentum (e.g. CH, HK, ID, IN (LC rating), and SL) vs. downgrade momentum in Europe."
- No 2#: Positive and rising rate differentials should be supportive of Asian FX —
"Asian CBs will likely continue to gradually de-link from the Fed given growth dynamics, lack of deflationary forces, unimpaired financial sector (credit growth still picking up in IN, ID, MY, SG, and TW), and bias by some CBs to use monetary policy to address asset bubbles. China is an exception - we now expect no hike this year."
- No 3#: Asia growth outperformance should continue to boost capital flows —
"While growth momentum in the Asia region is slowing, relative growth differential vs. rest of the world is unlikely to meaningfully change – net direct investment to the region is forecast to recover significantly this year, while inflows into EM funds (vs. developed markets) have remained resilient."
- No 4#: Asia FX undervaluation persists as external surpluses to grow — "Asia’s
official FX reserves are still close to their historic highs (despite revaluation loss on EUR in May) and will likely resume their climb in 2H 2010. Cost/risks of suppressing currencies will likely rise over time and pressure on China towards faster RMB appreciation is unlikely to cease."
- Macro Strategy — "1) Asia FX – we prefer IDR (high carry, low vol), KRW (cheap) and remove long SGDMYR (SGD at topside of the NEER band); 2) Asia rates – see some room for curve flattening in Indonesia; 3) Asia (sovereign) credits – look for opportunities to go long Sri Lanka$ amid expectations of new supply as a catch-up play vs. the strong rally in Indon$ and ROP$s."
Citigroup Asia Macro Strategy Outlook 20100723
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