UBS Equities-Global Strategy _USDAsia The lost smile_ Arora-109807581(1)

ab12August2024GlobalResearchandEvidenceLabGlobalStrategyUSD/Asia:Thelostsmile?AsiaFXvs.Equities-A5sigmadivergenceEMAsiacurrencieshavebeeninverselycorrelatedtoequitieswithanR-Squaredof50%.Thisrelationshipwasalreadyweakin1H,butpastweek'sdivergencebetweenthetwo(i.e.strongerFXinthefaceofequitiesweakness)wasoffthechartsby5standarddeviations.Wediscusswhythishappened,andwhatitmeansforcurrenciesoutlook.Positioning,sensitivitytoJPY/USTsthekeyneartermdrivers…NorthAsiancurrenciesroleasafunderforcarrytradesneedslittleintroduction.Theseunwindspartiallyexplaincurrencies'recentinsulationfromtheriskaversion-asalsoevidentintheirpastyear’scorrelationswithJPYandUSTs.Equallydominantfactorwasmutedequityoutflowsvis-a-visthemagnitudeoftheVaRshock.TechheavyduoofTW,SKrecordedlargeoutflows,buttheywereabsentelsewhere.Infact,assoonastheVIXspikereversed,flows/currenciescaughtupwithlowerUSTsyields....whilestructurally,theimprovedNIIPssupportcurrenciesdefensivenessThisevidenceonpositioning,whenzoomedoverthepastcoupleofyears,reflectshowthepersistentdragsfromChinaslowdownandlowrateshavealsoimprovedthenetinternationalinvestmentposition(NIIP)vis-a-vis2020.Portfolioflowliabilitiesinmostcountrieshavefallen(specificallyASEAN).Vice-versa,thesystem-widedollardepositsofthecorporates(i.e.theimplicitcarrytrade)haverisenbyabout200bn$ledbyTW,MYandTH;w...