Investors should be “underweight” Asian currencies and bonds this quarter because deteriorating economies in the region and Europe will bolster demand for dollars, according to JPMorgan Chase & Co.
“The clear implication of weak European and Asian growth with no large scale U.S. quantitative easing is a stronger dollar,” strategists including Hong Kong-based Bert Gochet and New York-based Ying Gu wrote in a report dated April 13. “Further large-scale inflows to emerging bond markets make little sense at these levels without a clear case for currency appreciation.”
The Bloomberg-JPMorgan Asia Dollar Index (ADXY) fell the most in four weeks after the cost of insuring Spain’s bonds against default surged to a record last week, with 10-year bond yields approaching the 7 percent levels that forced Greece, Ireland and Portugal to seek bailouts. China’s economy, which is second only to the U.S. in size, expanded 8.1 percent from a year earlier in the first quarter, the slowest growth since mid-2009.
JPMorgan said economic data in the current quarter will continue to paint “an unclear picture” in China, while the U.S. will no longer display as strong signs of recovery as it did in the first three months of 2012. Concerns about Europe “will re- surface in a meaningful way,” according to the report.
Within Asia, the biggest U.S. bank recommended investors hold less Indonesian rupiah and Malaysian ringgit than benchmark indexes suggest, and also underweight local-currency government bonds in Malaysia and Thailand. In addition, it advised using interest-rate swaps in Thailand, Malaysia, Singapore and China to profit from a steepening of the yield curve.
The bank announced a new trade for South Korea that involves paying a two-year interest-rate swap at 3.49 percent against the three-month certificate of deposit, which is currently 3.54 percent. The swap declined two basis points, or 0.02 percentage point, today to 3.48 percent, according to data compiled by Bloomberg.
JPMorgan estimated there is a 30 percent chance of a third round of bond purchases by the Federal Reserve, a non-consensus view in the market based on a Bloomberg survey of primary dealers. The Fed has announced two rounds of quantitative easing to hold borrowing costs down since 2008.
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