Citigroup - Asia Macro and Strategy Outlook

Citigroup - Asia Macro and Strategy Outlook: Searching For “A” Bottom (Not “The” Bottom)

We see tentative bottoming signs in recent data releases — Growth declines are moderating for most countries with month-on-month rebounds in Korea and Singapore. China data is mixed with fiscally-driven growth in full swing while trade data is weakening. However, our bleak outlook for G3, and uncertainty on the path of recovery, mean it is too early to call for "a" bottom, let alone “the” bottom.

Expectations on economic data are catching up with reality — Negative data surprises have narrowed significantly. We make no changes to our growth forecasts this month after significantly downgrading in February.

Policy responses: Rate cuts now slowing, intervention much less than US — While we are seeing additional fiscal stimulus (Korea and Malaysia), rate cuts are now slowing with China, Taiwan and Malaysia expected to pause (no ZIRP here), and only RBI pursuing limited QE.

FX reserves may have peaked in EM as a whole, but remain on the rise in some Asian economies — FX reserves in Hong Kong, Philippines, Taiwan and Thailand are still rising, helped by terms of trade improvement. China will likely resume its ascent after the recent reported recent dip.

We think Asia FX is at a turning point — Economic weakness, prompting Asia FX depreciation pressures, need to be counter-balanced by more aggressive monetary/quantitative and fiscal easing in the US, which would weigh on the US dollar. We remain residually bearish on the SGD and MYR but more bullish on INR and IDR. We remain wary of chasing sharp moves in the KRW, which has outperformed significantly.

With CB policy easing slowing, but bond supply concerns rising, we are more neutral on Asian rates — We would offset some selective long positions in the front-end of Indonesia, India and Singapore with paying on the back-end of Korea, Malaysia and Taiwan.