Nomura: Tech stock volatility adds to downward pressure on the dollar. How should investors position in the renminbi and Asian rates?

Why might a decline in US stocks weigh on the dollar?

The Nasdaq 100 index fell 2.9% on 22 October. Nomura’s high-frequency indicators also showed that foreign inflows into US equities slowed over the past week; the US still needs to finance its twin fiscal and current-account deficits, so the bank believes that reduced equity appeal will add to pressure for near-term dollar weakness.
This trade thesis does not require US stocks to enter a major bear market. US clients recently contacted by Nomura remain broadly positive on technology stocks; the bank is more focused on major technology companies’ capital spending, operating margins and earnings outlooks on October 28–29, believing that signs of a slowdown could trigger a larger negative market reaction.

On 22 October, Nomura raised its conviction in a short USD/CNH position from 3/5 to 4/5, with a target of 6.50 by the end of December. Support comes from actual foreign-exchange conversion: in September, Chinese companies converted a net 88.2 billion dollars from trade into renminbi, equivalent to 94.7% of the trade surplus after excluding renminbi settlement, indicating a stronger willingness to convert dollar receipts back into local currency.
The renminbi has also shown resilience against a stronger dollar: since 14 September, the dollar index has risen about 2.6%, while USD/CNH has instead fallen about 0.6%. Over the same period, the USD/CNY central parity rate was lowered by 563 points to 6.7180 on 23 October; Nomura therefore sees local foreign-exchange conversion and the policy environment as favourable for the renminbi, and expects seasonal repatriation of earnings in the fourth quarter to continue providing support.

Nomura maintains its long Singapore dollar versus Indonesian rupiah position, with conviction of 4/5 and a target of 14,440 by the end of November. The Singapore dollar is supported by the current annualised 1.25% appreciation slope of the nominal effective exchange rate policy band; Indonesia’s central bank, meanwhile, announced a 2 percentage-point cut in reserve requirements before year-end while the exchange rate was under pressure, prompting Nomura to worry that the policy’s pro-growth orientation will continue to affect the rupiah.
Funding pressure is already evident: after MSCI announced a related consultation on 15 October, foreign investors net sold 484 million dollars of Indonesian equities, bringing net outflows for the year to 5.4 billion dollars. Nomura estimates that equity outflows could reach around 8 billion dollars if the market’s status is downgraded; conversely, stronger foreign-exchange intervention or an emergency rate hike by the central bank would hurt the trade.
There is also a hurdle to further tightening of Singapore’s exchange-rate policy: core inflation in September was 2.0% year on year, below the consensus of 2.3% and the previous reading of 2.2%. Nomura believes any subsequent tightening will depend on trends in energy, food and core inflation.

Nomura maintains its receive-fixed Hong Kong dollar interest-rate swap trade, with its highest conviction of 5/5 and a target of 3.80% by the end of November, betting on lower rates. Its rationale is that its forecast for the Federal Reserve’s terminal rate is below market pricing, while ample liquidity at Hong Kong banks could limit the rise in Hong Kong dollar interbank rates.
The equivalent Korean trade remains at 4/5 conviction. After the original target was reached, the target was extended to 3.65% by the end of November. Lower government bond issuance, returning foreign demand and relatively weak domestic demand provide support; however, the Bank of Korea’s comments on growth and inflation have been hawkish, so Nomura is more cautious about the short end and has set the trade’s reassessment level at 3.95%.
Nomura has exited its position betting on a rise in Singapore five-year rates. Local credit and growth remain strong, but a safe-haven rally in US Treasuries has already driven Singapore dollar rates markedly lower; if the Monetary Authority of Singapore does not fully withdraw liquidity, seasonal easing in November and maturing government bonds will add funds to the banking system.

Nomura maintains its short USD/JPY position, with conviction of 3/5 and a year-end target of 152.50. Lower risk appetite, falling global yields, strong demand at Japan’s 20-year government bond auction and improving capital inflows together support the yen.
The focus of the Bank of Japan’s 30 October meeting is its language on inflation. The market broadly expects no rate hike at this meeting, but has priced in an approximately 80% probability of a 25-basis-point hike in December; Nomura believes an upward revision to inflation forecasts or a central-bank assessment that underlying inflation is close to 2% would strengthen the signal of further rate hikes.