Credit Suisse has turned tactically bullish on the U.S. dollar against Asian currencies after new U.S. Federal Reserve Chairman Jerome Powell’s testimony to Congress this week.
“Powell seems to have begun his term as Fed chairman by establishing himself as hawkish,” Credit Suisse said in a note dated Wednesday. “It’s still too early to be definitive about just how hawkish Powell will be. Nonetheless, we think markets will need to increase pricing for Fed hikes in the run-up to the March FOMC meeting.”
Credit Suisse said it expected this to spur a rise in U.S. real yields, giving the U.S. dollar support, which could weigh on Asia’s currencies.
”We view Powell’s testimony as adding to our bearish views on the Indian rupee and the Philippine peso,” the bank said. “It also turns us cautious on the South Korean won, the region’s premier beta play on equities.”
The bank said it expected Thailand’s current account surplus to support baht outperformance against most other Asian currencies, even in a scenario where the dollar/baht rises along with a general rise in dollar/Asia.
Ringgit to outperform
Outperformance in Malaysia’s ringgit is also supported by fundamentals, the bank said.
“Malaysia’s trade balance should continue to improve unless oil falls sharply, which we don’t currently expect,” Credit Suisse said. “We expect growth to surprise the consensus to the upside and inflation to moderate further, a nice mix for the ringgit. Elections seem likely to be called soon and the ringgit has historically performed well around elections.”
High yield and commodity currencies
High-yield and commodity currencies seem particularly vulnerable to a rising U.S. real rate scenario, the bank said.
“We have been cautious on the rupee and are now more bearish,” it said, pointing to India’s deteriorating trade balance and current account.
It raised its dollar/rupee forecasts to 66.5 in three months, up from 64.0 and to 67.0 in 12 months.
Credit Suisse was also negative on Indonesia’s rupiah.
’Wrong on the rupiah’
”We have been bullish and wrong on the rupiah,” it said, noting its trade balance was also deteriorating, and Indonesia’s equity flows turned negative in February. “Higher U.S. yields would likely challenge bond financing in the near term.”
Credit Suisse was also negative on the Philippine peso, called fundamentals “poor,” adding that suggestions of faster rate hikes make them worse. It recommended investors accumulate dollar/peso longs on any dips, targeting a rise to 53.0 in three months.
When it comes to China’s currency, Credit Suisse noted that its daily model of the yuan fix has seen a “notable” increase in the average error prediction rate since late December.
The bank said it implied China’s central bank was allowing a greater degree of market influence and volatility to pass through the official fix. That signalled a shift toward allowing a rise in two-way volatility for the yuan, Credit Suisse said.