Foreign Exchange and Interest Rate Strategies Amid Improving Global Conditions, Focusing on Local Risks in Asia

Overview

This report focuses on foreign exchange and interest rate strategies against the backdrop of improving global conditions, with a particular emphasis on trading opportunities in Asian and G10 currency pairs. Key conclusions include upgrading the Singapore dollar against the Indonesian rupiah (SGD/IDR) to the highest confidence level, maintaining a bearish stance on the US dollar against the Chinese yuan (USD/CNH), and monitoring the potential impact of US-Iran agreement progress on oil prices and the USD. The report underscores local economic data (such as inflation and employment) and central bank policy shifts as key drivers of short-term market movements.

Core views

In Asian FX strategy, Nomura has raised confidence in SGD/IDR to 5/5 (highest level), targeting 14,600 by end-August, driven by Indonesian policy risks (resource export centralization, widening fiscal deficit), foreign capital outflow pressures (MSCI index adjustments), and Singapore's economic resilience. The bearish view on USD/CNY is maintained (confidence 4/5), with a target of 6.60, supported by undervalued CNY, easing US-China tensions, and anticipated capital inflows into the AI sector. The bearish stance on USD/TWD (confidence 3/5) benefits from tech sector capital inflows and a weakening USD environment. In G10 FX strategy, the bullish view on CHF/JPY (confidence 4/5) targets 206.50 by end-June, owing to restrained Swiss National Bank intervention and safe-haven flows supporting the CHF. The bearish view on AUD/NZD (confidence 4/5) targets 1.1750, reflecting the divergence between the RBNZ's hawkish stance and Australia's weak inflation. The bullish EUR/GBP (confidence 3/5) bets on stronger-than-expected Eurozone inflation data prompting more aggressive ECB rate hikes. In interest rate strategies, India has initiated a 1s5s NDOIS flattening trade (confidence 3/5), anticipating an RBI rate hike cycle. Korea maintains a 2y2y NDIRS receiving position (confidence 3/5), betting on curve flattening ahead of BOK rate hikes. China recommends paying 3-year NDIRS (confidence 3/5), as loose liquidity supports bond markets but resistance levels warrant caution.

Analysis framework

The report employs a three-dimensional analytical framework of 'geopolitics + macroeconomic data + central bank policies': first assessing the transmission path of US-Iran agreement progress to oil prices and the USD (an agreement could lower oil prices, benefiting risk currencies); then gauging central bank policy inclinations through inflation and employment data (e.g., weaker-than-expected US nonfarm payrolls could reinforce Fed dovishness); finally validating trade logic with valuation models (e.g., CNY REER undervalued by 19.9%) and capital flows (MSCI index adjustments triggering foreign flows). The methodology emphasizes the independent impact of local factors (e.g., Indonesia's fiscal deficit, Taiwan's tech capex) on exchange rates, cautioning against regional risks even as global conditions improve.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Exchange rate drivers decomposed into supply-side (central bank policies, foreign flows) and demand-side (terms of trade, capital inflows)

  When analyzing IDR depreciation, the report examines both supply-side (foreign outflows due to MSCI adjustments) and demand-side (export controls weakening trade surplus), reflecting dual verification logic

• Cycle & Sentiment FrameworkInflection Point Analysis

  Anticipating central bank policy shifts via inflation and employment data

  For example, weaker-than-expected US nonfarm payrolls could signal a USD weakening inflection point by reinforcing Fed dovishness

• Valuation methods

  Multi-model FX valuation (including productivity-adjusted REER)

  The report notes CNY is undervalued by 9.7% (four-model average), with productivity-adjusted REER undervaluation at 19.9%, providing a valuation anchor for USD/CNY bearishness

• Fixed Income & Credit AnalysisYield curve analysis

  Yield curve shape trades (flattening/steepening)

  India's 1s5s NDOIS flattening trade is based on historical patterns: curves often flatten at the start of central bank hiking cycles

Key data

• SGD/IDR Target14,600End-August target, confidence level 5/5 (highest)
• USD/CNH Target6.60End-August target, confidence level 4/5
• US May Nonfarm Consensus+93KNomura forecasts +110K; weaker data could weigh on USD
• Indonesia April Fiscal Deficit-IDR164.4trnLargest April deficit in 12 years, dragging IDR
• CNY REER Undervaluation19.9%Productivity-adjusted valuation, supporting appreciation expectations

Impact & implications

The report argues that a US-Iran agreement, by lowering oil prices, would ease inflation pressures for Asian energy importers, benefiting risk currencies (e.g., TWD, KRW). However, local factors (e.g., Indonesian policy risks, Indian capital outflows) may offset global positives, leading to regional currency divergence. In rate strategies, Asian central bank hiking cycles (e.g., Korea, India) could drive yield curve flattening, while China's loose liquidity supports bond markets but warrants caution on supply pressures.

Risks

• US-Iran agreement talks break down or delay, oil rebound hurting risk currencies
• Asian inflation exceeds expectations, forcing aggressive central bank hikes
• MSCI index adjustments trigger larger-than-expected foreign outflows
• China tightens liquidity faster than expected, disrupting bond strategies

What to watch

• June 5 US nonfarm payrolls
• June 5 RBI monetary policy meeting
• June 11 ECB rate decision
• June 18 MSCI Indonesia free float factor review
• Progress toward final US-Iran agreement