We have become even more positive on Asian currencies. We are outright bullish for Q4 11 and Q1 12. I was in China and Indonesia recently. I will be in Korea next week.
Our top currency picks are KRW, IDR and SGD. INR and CNH/CNY will under-perform. Note that our coverage of Asian currencies is limited to CNY/CNH, IDR, INR, KRW, and SGD.
Our positive views on Asian currencies have been on for a few months, although we had some short-term concerns mentioned in our September 28 report Clouds before sunshine.
We maintain our view, first mentioned in our October 4 report Disconnect between Markets and Macro, that risk on sentiment towards Asia would materialize on a sustained basis from late October to early November onwards.
Similar to heading into US TARP policy finalization during the Lehman crisis years, there are plenty of skeptics in financial markets worried about the implementation details of the EU policy announcements relating to containing the debt crisis in continental Europe.
From an Asia Strategy perspective, we do recognize that there are hurdles along the way for EU policy to come to fruition.
However, in our view, enough progress has been made such that systemic and contagion risks to global macro and market conditions in so far as it relates to the impact on Asian markets and economies has been contained for the next 1-2 quarters.
What is also encouraging for Asian markets is that the US and Japan economic recovery is continuing and getting more fully entrenched. This has been preceded by a pick-up in the September data points for Asia and the Q4 11 data will continue to improve in our view.
As long as global macro & market conditions along with recovery in Asia continues, we see limited risks of a sustained sell off in Asian currencies into Q1 12.
Current account surpluses are already starting to rise in Korea and we expect China, Indonesia, and Singapore to follow in Q4 11. India will continue to run sustained current account deficits in the next 1-3 quarters.
We expect net equity inflows to North Asia to materialize first followed by Southeast Asia and to a much lesser extent to India. The top destinations in Asia for local currency bond market investors (including Asian central banks) will be Korea and Indonesia in our view.
Our Global FX Strategy team is forecasting EURUSD at 1.43 in Q1 12 and 1.45 in Q2 12, with risks tilted to the upside.
From an Asia Strategy perspective, our Global FX Strategy team’s views on EURUSD will gain further support by a turn up from a light trading book positioning of Asian central banks and sovereign wealth funds in the European fixed income markets.
Directionally, if the above views on EURUSD materialize, this will give us further support to our bullish views on Asian currencies.
The downside risks to our positive Asia FX views are that risks related to peripheral Europe and US debt dynamics become unmanageable and escalate, global growth slows considerably, and global financial markets weaken on a sustained basis.
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Skandinaviska Enskilda Banken AB