Asia Potential Driver of Short USD Cycle

The report argues that an Asia-led downward cycle for the US Dollar is likely, catalyzed by the reopening of the Hormuz strait and subsequent asset reallocation from US Treasuries to JGBs and increased FX hedging in Taiwan.

Key Takeaways

• 1.The reopening of the Hormuz strait is identified as a primary catalyst that would lower energy prices and US yields, triggering an appreciation in Asian currencies (JPY, KRW, TWD).
• 2.The Japanese insurance sector is incentivized to repatriate assets, shifting from US Treasuries to JGBs as yields converge, which implies selling USD from unhedged exposures.
• 3.Taiwanese life insurers have significant scope to increase tactical FX hedge ratios, potentially selling USD after having slashed hedges previously.

Table of Contents

• Key points
• A reopening of the Hormuz strait would be the initial trigger
• The incentives for Japan inc. to reallocate to hold domestic bonds are in place
• Tactical FX hedge ratios have scope to increase in Taiwan in particular
• The outlook for Chinese FX policy is a bit of question mark
• In summary a short Dollar cycle could emerge once the Hormuz strait reopens

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