"Countries with large structural imbalances will probably pay the price."- Daniel Rico, Emerging Markets FX Strategist, RBC Capital Markets
This month, Daniel Rico sits down with Alvin Tan and Daria Parkhomenko to discuss the 2021 outlook for FX and a few of their favorite thematic trades, including short AUD/MXN, long ZAR/INR, and long IDR/TWD.
Short AUD/MXN
- Mexico’s diverse economic activity can provide additional tailwinds for MXN.
- A swift implementation of the infrastructure/energy plan under a clear-business-friendly regulatory framework could offer an additional push higher for MXN as the infra-projects attract FDI.
- AUD is a much more attractive funding currency than USD when crossed against MXN.
Long ZAR/INR
- In a mildly positive risk backdrop for 2021, ZAR is likely to outperform INR, given the ZAR's real interest rate premium and higher beta to global equities.
- South Africa’s challenging growth and fiscal dynamics are well-known and largely priced-in, and a supportive global risk backdrop is likely to overshadow domestic developments.
- India also has a weak fiscal position, with a debt-to-GDP ratio approaching 90%.
- Further RBI easing measures are expected next year, including continued purchases of US dollars and interest rate cuts when inflation finally starts to dip. The SARB by contrast is likely to keep rates steady next year.
Long IDR/TWD
- IDR is expected to do well on the back of high real bond yields, a decent fiscal position, and potential supply-side diversification shifts.
- Meanwhile, the Taiwan central bank is keeping a tight rein on TWD, and the NDF market has priced in a large forward premium such the implied yield makes it a very attractive funding currency in a positive risk environment.
- The main negative for Indonesia remains Bank Indonesia's primary market bond purchases, but foreign investors will be willing to overlook this so long as inflation remains low.
