Longs USDTWD on its attractive carry are encouraged as the China exposure sentiment toward EM currencies could be in the process of shifting and we prefer to focus on regional low yielders in expressing a bullish dollar view.
The slew of hawkish commentary from Fed officials in recent weeks as put the possibility of a rate hike back in play for H2. Chinese growth should be biased to downward surprises as the year progresses.
Markets have been complacent to these growing risks and short dollar positioning could start to shift to a more neutral exposure. In Asia, long USDTWD looks appealing on both the Fed and China angles. The TWD is a rate-sensitive currency given the dominance of local life insurance companies in deciding to allocate to local or foreign bonds.
During August, the TWD strengthened more than rate differentials would have suggested so it is prone to a realignment on this front. Taiwan is also the most impacted country from China’s growth slowdown (direct and re-exports to China is the highest in EM).
While a repeat of the stresses experienced in 2015 are unlikely (investors are better conditioned to the known risks), risk-reward is starting to favour long dollar positions to fade the EM rally.
But on the contrary, technically, after two weeks of rallies in USDTWD, shooting star pattern candle is spotted out on weekly charts losing the momentum in previous rallies.
Moreover, we see no traces of significant bounce back so far except the most likely hammer pattern candle formation on the monthly graph. Whereas, the ongoing upswings on both daily and weekly charts seem exhausted with leading oscillators approaching overbought trajectory.
Despite these upswings have remained well below DMAs and EMAs, while MACD evidences bearish crossover again both time frames.
Thus, speculating further upswings are absolutely not advisable; instead, foreign traders with short term dollar exposures are advised hedging upside risks.