Overview: Prospects of a further drift higher in core rates and murkiness around the USD view suggests that the going in local markets is unlikely to get easier in H2. The inevitable Fed tapering announcement in H2 should not cause a 2013 style washout, due to a mix of healthier ‘original sin’ variables, a strong China anchor, and re-opening optimism as vaccinations increase. Country-level differentiation will be key in H2, but variation in COVID cases/vaccinations is not a reliable RV axis, especially for rates. We enter H2 with a MW stance on both duration and FX in GBI EM Asia, with cross-market views expressed via OW TH, ID vs. UW MY in rates and OW IDR vs. UW PHP in FX.

 Rates: While global EM rates sold off en masse in Q1, price action became materially more dispersed in Q2, illustrated by the large variations in the shape of 1y1y-1y IRS curves across markets, and the diverging path of 5y IDR vs 5y RUB bond yields since 2Q. We believe Asia rate markets will be able to differentiate countries by their respective monetary policy cycle divergences: we are long rates in Thailand, Singapore, Indonesia vs. short in Korea, Malaysia, US, India and Taiwan. We enter two new trades today: 1) pay 2y MYR NDIRS; 2) long 5y IGB vs. pay 2x dv01 of 5y INR NDOIS.

 FX: Global capex is running hot which generally lifts all Asian FX boats, and in this instance is also creating upside surprises on Asian exports in the laggards of South Asia as North Asian export momentum  starts to plateau. North/South FX RVs are not straightforward however; our favored long pick in S. Asia FX is IDR, which should outperform INR carry. A more hawkish Fed turn and higher UST yields will also likely create periodic volatility in USD/Asia, even as growth sentiment improves as economies start to re-open. CNY FX is expected to be range-bound around current elevated levels in H2 as a robust BoP meets greater official resistance, but still outperform TWD and KRW; we sell CNH/TWD puts as an expression of this passive constructive view on CNY.