‘Truce’ has surely become one of the more trending words in currency and financial market commentary in recent weeks. It is indeed appealing to think that policymakers might be able to collectively overcome the tragedy of the commons that currency wars entail. The temptation to cheat, though, and follow one’s own rational self interests, is likely high, even if that will ultimately be contrary to the common good of everyone involved. With every single G10 and major EM currency having appreciated against the dollar since the beginning of March, the peace has held in thus far. But for how long? Japan is probably the most in focus in how much further it can extend on its limited policy choices without pulling out of the ‘pact’. But it could easily apply to the others too. The ‘sweet spot’ for China (stable USDCNY and a weaker trade weighted RMB - down 3%+ year to date) has been useful (even critical) to stabilize risk sentiment. But will trade competitiveness concerns eventually make others complain?The truce has been good for Asia markets. With $22bn of total offshore buying of Asia (ex-China) equities and local currency debt, March was the strongest month for inflows into the region in the past 5 years. The biggest swing overall in March was in Malaysia, which pulled in a total of $4.6bn across equities and debt, making it the most favored market in the region, except for Taiwan, which pulled in $5.1bn in equities. See the Macro Strategy Section.

We have been of the view that while the currency peace lasts, it’s best to focus on local stories in the region, and on relative value trades. In the FX Strategy section this week, we take stock of the shifting risk-reward to some of our outstanding recommendations, and in particular SGD/INR and MYR/PHP. One of the things we note is how comfortable the market seems to have got with the idea of a quiet MAS meeting next week, and even though we agree, we worry about the benign market pricing. Similarly, we are shifting stops on our long MYR exposure, even while we reiterate our view to buy USD/PHP calls ahead of elections.

In the rest of the report this week, we look first in the Economics section at how the export base erosion is challenging Asia’s growth model. In the Fixed Income Strategy section on China, we look at the balance of factors for the local markets, which we believe is biased towards a steepening of the curve.

We have a section dedicated to India and the RBI announcement this week, which we consider a regime shift in policy thinking around management of liquidity. We see this ultimately reducing liquidity premium and helping with better transmission of policy - we like 1Y5Y NDOIS steepeners. It should arguably be on the margin bearish for the currency, though maybe more importantly, it should lower FX vol. Finally, we note the upcoming events in Korea (General Elections and MPC), and reiterate our view of preferring MGII over MGS in the Malaysian market.

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