FX Viewpoint | Asian FX: When the dust settles | Article – HSBC VisionGo

Asian FX: When the dust settles
Finance  ·    ·  6 mins read

  • Asian currencies dropped after the June FOMC meeting
  • Yet, we believe the smaller and more open ASEAN currencies should regain some lost ground later this year
  • For the RMB, domestic factors should be more dominant than the broad USD trend, in our view

The USD had a strong knee-jerk reaction to the new dot plot released in the June FOMC meeting, and no Asian currency was immune to this

The broad USD rebounded sharply in the second half of June, after the Federal Open Market Committee (FOMC) meeting on 15-16 June (see FX Spotlight – 17 June 2021 | “FOMC: USD goes dotty” for details). No Asian currency was immune to the re-pricing (higher) of short-term US Treasury yields The THB was especially affected, while the higher-yielding INR depreciated relatively more. Conversely, the SGD held up slightly better. Such a performance ranking should not come as a surprise, and the USD’s strong knee-jerk reaction to the new dot plot is also understandable, in our view. The question is: Is it sustainable?

We maintain our view that most Asian currencies should strengthen against the USD by year-end from current levels

When the dust settles, we believe the smaller and more open ASEAN currencies, such as the SGD and MYR, should be able to regain some lost ground as markets re-focus on their vaccination progress and re-opening timelines. The higher-yielding currencies, such as the INR, may remain relatively more subdued because of the Federal Reserve’s (Fed) impending tapering, but we think weak domestic demand in these economies should restrain their current account deficits and put a lid on inflationary pressures, thereby making them less vulnerable this time around compared to the 2013 ‘taper tantrum’ episode[1]. That said, we are cognizant of the risks to our view, if the broad USD trend changes.

The main drivers for the RMB should be domestic factors, rather than the broad USD trend, in our view

For the RMB, domestic factors should be more dominant than the broad USD trend, in our view. In China, economic activity data for May was generally below consensus expectations. The RMB’s cyclical advantage has indeed narrowed. This will be reflected in rate differentials, current account dynamics (narrowing surplus), and capital flows (less inflows from foreigners, more outflows from locals).  

[1] The 2013 ‘Taper Tantrum’ refers to the surge in US Treasury yields, resulting from the Fed’s announcement of future quantitative easing tapering. This caused significant FX volatility for those with weak external positions and began a period of decline for a number of emerging markets currencies. 

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