From BNPP’s Richard Iley via FTAlphaville:
Asia ex-Japan is inevitably caught in the increasingly dangerous cross fire of these currency wars. In essence, there are two pernicious dynamics at play. First, those economies with USD pegs – de facto (China) or de jure (Hong Kong) are inevitably directly importing the stronger USD and so are accordingly seeing a dramatic loss of competitiveness vs. the EUR and the JPY. Secondly, with the world likely to remain awash of liquidity for the next 12-18 months, the inevitable normalisation of still permissive global financial conditions is likely to remain impeded.
In particular, while FX volatility has picked up strongly as the USD has rallied and now appears to have bedded down around normal levels, bond market volatility is likely to remain below normal as QE caps euro-zone and Japanese yields and encourages continued ‘reach for yield’ elsewhere. A faster-than-currently-expected pace of tightening by the US Fed inevitably has the capacity to see bond market volatility spike in the coming months but the sheer weight of liquidity creation by the ECB and BoJ are likely to militate against a sustained surge in volatility. In the short-term at least, our bespoke risk and volatility gauge (RAVI), after threatening to normalise, is around 0.3 standard deviations below normal (Chart 4).
