Research Briefing | Oct 6, 2022

Local rates and FX: Asian local currency sovereigns – not long now

The pieces are almost in place for a high conviction OW on Asian local currency debt, but not quite. Indeed, we maintain a cautious view on all EM local currency sovereign bonds, including Asia, given the relentless concern over the dollar and domestic inflationary pressures.

What you will learn:

  • We think the two big global monetary forces will soon start to pull in opposite directions. Dollar strength has kept an uncomfortable grip on EM bonds for the last couple of years, and we don’t expect it to weaken through the next 12 months.
  • There are good reasons for Asian policy rates to have lagged other EMs, including ongoing currency strength, but even controlling for differing cyclical positions, we find Asian monetary policy typically to be behind the curve. This continues to be a deterrent to go OW Asian FI.
  • There isn’t much daylight between us and markets on projections for short-term rates. Our baseline forecast for policy rates is below markets, but our economists see prolonged inflation as one of the biggest risks facing the region.
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