Trump means a lot for Asia FX – Nomura

Research Team at Nomura, suggests that the recent selloff in both MYR and IDR (spot and NDFs) looks relatively extreme, but Nomura do not expect any significant pull back in the near term and see increased spot depreciation risks.

Key Quotes

“In our view, the positivity around Indonesia was already largely priced into the FX market and numerous global risks (including Trump and the prospect of higher global rates) suggest that being long IDR spreads was an asymmetric trade.”

“From here, there are still some risks of IDR and MYR NDF points moving higher if the market begins to believe severe balance of payments pressures are likely and/or if spot continues to be held stable from central bank USD-selling FX intervention. In addition, if concerns increase over a potential imposition of macroprudential controls to limit FX depreciation pressures, this could actually intensify the bid in NDFs and also weaken the prospect of future foreign portfolio investment.”

“That said, there is scope for both Indonesia and Malaysia’s central banks to allow for some of the FX selling pressure to be released in the spot market, which would help to ease some of the upside pressure in NDF points. Indeed, we believe that the current high cost to hedge against MYR and IDR depreciation could already be a limiting factor for real-money investors to build on long USD/(IDR or MYR) NDF hedges. These high hedging costs could imply that the next phase may involve some unwinding of local asset holdings. Given the high level of foreign bond holdings, there is significant potential for additional selling, as investors focus on global risks such as Trump/Fed hikes/ECB & BoJ tapering risk, and fears of local macro-prudential measures to limit outflows.”

“However, even though foreign bond holdings alone are large relative to FX reserves (Indonesia at USD52.2bn or 48.0% of FX reserves; Malaysia at USD53.6bn or 59.6% of FX reserves in October), IMF FX reserve adequacy measures (taking into account broader outflow risks) still suggest that both Malaysia and Indonesia have sufficient reserves (at least in the near term) to handle balance of payment pressures. In addition, beyond the current level of FX reserves, these central banks have other measures that could be activated (from macroprudential to external financing) if selling pressures continue to intensify. That said, the problem at this juncture is, if those measures are endorsed (and only partially), the market could view that as a sign of weakness.”