Thursday 28 Mar 2024
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SINGAPORE (June 22): Citi Research’s chief economist continues to expect the “remain in the EU” side to win, amid increasing uncertainty of the outcome. Results of the UK’s EU referendum – which determines whether Britain stays or leaves the EU – are expected to be out this Friday.

In a report published last Thursday, Citi says that regardless of a Brexit or Bremain outcome, it is likely to emerge looking to add risk in emerging markets (EM) in Asia.

This is because in Citi’s opinion, additional negative fundamental and political impulses will probably take time to pan out — while in the short run, policy makers are likely to quickly add further stimulus and limit spill overs. The result is an opportunity to add risk in EM given the “broadly constructive backdrop amidst a much more dovish Fed and a period of some stability in Chinese data and markets,” says the team.

The research house recommends adding EM exposure immediately in Asia’s case, if ‘Remain’ prevails, or a few days after the vote if ‘Leave’ is victorious.

“If Brexit is avoided, we believe investors will quickly come back to the bullish EM trade based on a dovish Fed,” says Citi on the subject of the EU referendum results impacting EM markets as a whole.

“If Brexit happens, it is likely that there will be a sharp but short sell-off in EM. But this may well turn out to be a buying opportunity given that fundamentally very little will change.”

Based on its recent analysis findings, it has drawn the following conclusions for Asian EM currencies:

Singapore Dollar (SGD)

Citi says it is “more keen to once again consider SGD a safe-haven currency” in Asia. The SGD has been noted by the team for its relative improvement in performance. This makes it less appealing to fade SGD strength versus its nominal effective exchange rate (NEER) basket before approaching the edge of its trading band.

Malaysian Ringgit (MYR)* and Indonesian Ringgit (IDR)*

Both Indonesia and Malaysia have been highlighted as “good candidates to hold duration exposure” in the anticipated event of a post-vote risk recovery, as they trade more akin to credit products than pure rates — leaving these markets “vulnerable to a deterioration in risk appetite.” These two countries’ bond yields are the only exceptions to their Asian counterparts, which are mostly “weakly correlated with global market conditions”.

Korean Won (KRW)*

Citi says tactically paying KRW interest rate swap (IRS) is a candidate for a sharp recovery in risk sentiment after the vote.

The Korean IRS market has emerged as “the most vulnerable to a recovery in risk sentiment”, as it is found to be the most strongly correlated to Citi’s Global Risk Aversion Macro Index (GRAMI). Citi’s research team adds that additionally-received positions have “probably been built up in response to (June 9) surprise rate-cut, even though the Bank of Korea rarely moves policy at successive meetings”.

Indian Rupee (INR)

India and China are found to have “much stronger links to the European economies relative to the rest of the (Asian) region”. Hence, Citi cautions against holding sizeable long positions in INR in anticipation of elevated uncertainty surrounding European economies in the case of a Brexit. Investors should instead consider adding exposure to duration in India and China in such a scenario, says the research house.

INR remains Citi’s candidate currency to fund short EM exposure elsewhere in the event of a disruptive outcome. While INR is now “much less risky”, MYR is “significantly more so” — reflecting the opposite changes since the European crisis to the terms of their trade, FX reserves adequacy, and political outlook among factors.

*MYR, IDR and KRW are the highest-beta EM currencies, and Citi says it remains biased to adding bullish exposure to these three currencies in the case of a Bremain.

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