Sacha Tihanyi

Senior Currency Strategist

+852 2861-4770
Sacha.Tihanyi@scotabank.com
GLOBAL FX STRATEGY
Scota Asian FX Update
Thursday, September 11, 2014

EM FX AND USD/ASIA DIRECTION CONSISTENT WITH OUR VIEWS
Trading paterns and recoupling in EM currencies over the past few sessions is highly suggestve of what is to come.
Weaker Asian VX emanates from worries over hawkish shif in Fed guidance, and rising US rates volatlity.
We maintain our structural view for upwards pressure on USD/Asia, to be driven




Despite the stabilizaton in USD strength today,
the trading paterns of the past few sessions
have been very suggestve of the key structural
theme relevant for Asian FX that informs our
longer term forecasts as we move further away
from the summer and into the end of the year.

Over the past four sessions weve see general EM
FX under a reasonable amount of pressure, with
EM vol fnally picking up, though stll nowhere in
line with the relatve increase in G7 vol. EM Asian
vol, typically a laggard compared to overall EM
vol this year, has also made an equivalent move
higher (see chart), in line with increased US rates
volatlity, a key metric we have pointed out in the
past as what to watch for an indicaton of a turn
in the suppressed vol environment. A pickup in
rates volatlity is refectve of the pricing-in of
increased risk that the Fed is shifing more
hawkish, a key factor in our view on USD/Asia.


Scanning key correlatve metrics, besides US rates volatlity (which rates opton volatlity indices are showing a trend pickup),
the EM currency complex that took it on the chin so heavily last year is also seeing signifcant pressure. ZAR and BRL are
down over 2% in the past fve sessions, while TRY has fallen 1.7%. Asia has fared beter but is stll showing tell-tale signs of
pressure that global macro-fnancial conditons are turning inhospitable. KRW and INR have shed nearly 1% over the same
tme period, and both of these currencies as well as IDR and PHP are showing daily trading paterns much like those in BRL,
TRY and ZAR. This is consistent with our directonal view towards the end of the year.


The driver of the move, which has come despite weaker US nonfarm data last week, remains concern over the potental
change in signals coming from the Federal Reserve. This has been driven by the San Francisco Fed paper we noted earlier this
week, as well as a couple of stories in major fnancial press outlets that have suggested that the Fed is likely to alter its state-
ment to provide greater guidance and clarity on Fed Funds. This is an element we had suggested in recent months that would
be required, given the improved economic data and the complete lack of guidance provided by Chair Yellen at the Jackson
Hole conference. Indeed if anything, Chair Yellens address increased uncertainty by suggestng that essentally every eco-
nomic indicator is imperfect insofar as it informs potental Fed policy decisions (there is truth to this of course).


This increases the event risk at the upcoming FOMC meetng next week, though as with all market positoning on the pro-
spect of increased risk, it also suggests that should the FOMC not put in place a signifcant change in messaging, markets
could unwind current positoning on the assumpton that Chair Yellens and the more dovish members of the FOMC remain in
control of general consensus. This looks less likely at the moment (thus market positoning is justfed) as guidance will need
to tghten up in the not too distance future, if not at the next meetng. While we may retrace to some degree the move of
recent sessions, we are confdent that the medium to longer term directonal risk implied by the moves is correct.
6.0
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87.00
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89.00
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Scotia USD/Asia ex-JPN Index
EM Asia FX 1yr Vol
Source: Bloomberg, Scota FX Strategy
EM FX VOLATILITY FINALLY KICKING OFF

2
Global FX Strategy Thursday, September 11, 2014


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GLOBAL FX STRATEGY CONTACTS

THE MAJORS & PRIMARY CURRENCIES
Camilla Suton CFA, CMT Chief Currency Strategist 416-866-5470 Camilla.Suton@scotabank.com
Eric Theoret CFA, CMT Currency Strategist 416-863-7030 Eric.Theoret@scotabank.com

LATAM CURRENCIES
Eduardo Suarez Senior Currency Strategist 416-945-4538 Eduardo.Suarez@scotabank.com

ASIAN CURRENCIES
Sacha Tihanyi Senior Currency Strategist 852-6117-6070 Sacha.Tihanyi@scotabank.com


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