16 May 2013 FX Blueprint Dashing Buck Theme In: Japanese Takeaway We expect sensitivity to the JPY and offshore portfolio allocation preferences will continue to drive Asian FX. We are long USD/KRVV, USD/SGD & MYR/JPY. Asian FX returns this year have largely been driven by varying sensitivities to the JPY. Correlations to the JPY (first chart) differentiate the relative laggards - that compete for exports and portfolio flows with Japan - from the relative leaders - that are integrated into Japanese supply chains and should benefit from Japanese import demand, FDI, and potential QE- induced portfolio investment. With USD/JPY breaking into the triple-digit atmosphere, and a bulk of the "real" flow impact from Japanese policies yet to materialize, these divergent correlations remain the best guide to regional FX trends. in our view. In addition to the JPY, the outperformance of EM debt over EM equity fund flows has boosted debt-centric ASEAN FX over equity- centric North Asian FX. We believe this trend has legs but will become more selective. KR1.1V has the most to lose from JP? weakness. Competitiveness metrics such as export similarity indices point to a trade channel vulnerability. But the real pressure point comes from the portfolio channel. Earnings expectation downgrades for Korean companies and upgrades in Japan are driving relative equity market performance, resulting in flows into Japan and away from Korea. Importantly, an identical trend unfolded during the JPY weakness of 2004.07 (second chart). Politicization of FX may also drive further monetary easing and FX intervention in Korea. By comparison, TVVD losses should be more subdued from here given weaker export competition with Japan, stronger equity inflows and central bank USD supply. SEA) is the Ftuntst USD WU, in Asia. By virtue of its NEER framework, the USD IVO has consistently been the top driver of USD/SGD. Unsurprisingly then, the importance of the JPY to SG