With 100 days of unexpected clear sailing for Asia FX under our belts, local EM currencies continued to strengthen despite the reflationary trade fading and commodity prices flagging, as inflows remain robust with the greenback floundering and US yields falling. Also, the markets maximal negative view of US protectionism has given way to a more utilitarian outlook as the US administration are addressing pockets of concern while taking a more fragmentary approach.
Given the disappointments in US policy and economic data since the dovish Fed hike in mid-March, it’s unlikely we’ll see any shift in Fed forward guidance which should continue to support inflows to EM Asia as the USD should remain soft while the Fed dot plots remain unaltered.
However, there does exist some archival evidence that seasonality in May is typically negative for EM and commodity-linked currencies, which suggest that the APAC EM space may get off to a cautious start this month given historical patterns. Unless there is some massive surprise from either the French election second ballot or impetus from a more hawkish Federal Reserve board, it’s more likely the overhang from murky US economic policy will continue to keep the dollar on the defensive and US yields contained.
The softer US dollar and interest rate environment will continue to support the Indian rupee carry trade and investor yield appeal should remain robust.
On the rating front, it’s surprising that India’s credit rating has continued to be a grade above junk and unchanged since 2007. The expected rating upgrade will appeal to a broader spectrum of foreign investors, and there should be an acceleration of inflows.
The Yuan continues to consolidate with dealers eyeing this week’s PMI gauges. But the near-term fate of the Yuan is very much linked to US interest rates. With zero expectations for a rate hike during this week’s FOMC, traders will look past this week’s event and focus on Friday’s Non-Farm Payrolls. The data will likely weigh large on market expectation for June US interest rate hike. Currently, the market is pricing in a 70% probability of a June hike.
The undervalued Ringgit continues to play catch up with its regional peers as the US dollar wobbles, and the local economy remains resilient. While oil prices a constant concern, the outlook remains uncertain. With the Ringgit and Malaysia assets underweight, there should be a strong appeal in this benign Federal Reserve environment and even more so as the BNM introduces more onshore market liberalization initiatives down the road. As such, expect Malaysia Bonds to continue rallying with robust offshore demand.
Geopolitical concerns continue to hobble the Won, but the KRW should strengthen once these concerns eventually fade. But with Sabres still rattling, investors will likely view other ASEAN currencies a bit more favorably until the war clouds dissipate. Also, Trump’s recent trade tirade or a call to rewrite—or rip up the current trade agreement ( Korus) with South Korea caught the market off guard on Friday. Whether it’s little more than a NAFTA styled “test balloon” or not, the timing is flat out wrong with geopolitical tensions still frothing. Friend or foe, it appears no one is exempt from the wrath of President Trump