Positive Short-Term Outlook For Asian Currencies As The USD Weakens

Money Matters / Investing

Positive Short-Term Outlook For Asian Currencies As The USD Weakens

Investors on alert as USD index falls, although constructive in the medium term

Written by Sailesh K. Jha on 20 March 2017

With the exception of US Federal Reserve speakers Janet Yellen speaking on Thursday and Neel Kashkari on Friday as well as the debate among the top five candidates in France’s presidential elections on Monday, this week is going to be light on macro data and events. Meanwhile, Singapore’s February Consumer Price Index (CPI) inflation data will be released on Thursday.

Most major Asian currencies likely to continue rallying

The market will be watching commodity prices closely this week as it continues to digest last week’s US Fed FOMC implications for oil, iron ore and the USD. Commodity prices and USD movements will also have implications for major Asian currencies, which rallied last week. Broadly speaking, we expect most major Asian currencies to continue rallying against the USD this week as the USD index falls.

Hence, the short-term outlook is positive for investors with major Asian currency (JPY, SGD) exposure. However – on a three- to six-month basis – we remain constructive on the USD as the US Fed comes closer to our view of four hikes in 2017 versus their current disposition of three hikes in total.

The market will be watching commodity prices such as WTI oil (which has fallen by around 9.4% since 1 March to USD48.78 per barrel as of 17 March), iron ore (which has risen by 2.8% since 1 March to 717 CNY/MT as of 17 March) and the USD index (DXY)(which has fallen by around 1.5% since 1 March to 110.3 as of 17 March). We believe the DXY index could further weaken this week.

Key Numbers

Positive short-term outlook for Asian currencies as the USD weakens In numbers

US Fed less hawkish than market expectations

In our view, the biggest surprise last week came in the form of statements by the US Fed FOMC – which were less hawkish than expected. The Fed continued to guide that a total of three policy interest rate hikes in 25 basis-point increments could materialise in 2017, which includes the first hike for 2017 of 25 basis points (bps) to 0.75-1.0% last week.

The market had thought – at Chairman Yellen’s press conference – that guidance would be adjusted towards a steeper trajectory of policy interest rates hikes in 2017 on the back of a stronger assessment of macroeconomic conditions. This didn’t happen.

In our view, the Fed is worried about the durability of the upward trend in commodity prices since 2016, credit risks in China and uncertainty on the outlook for US fiscal policy. We continue to expect the Fed to hike the policy interest rate four times in 25 basis-point increments in 2017. As a result, we believe hedging rising US interest rate risk is appropriate.

In China, the central bank (PBoC) unexpectedly raised the seven-day reverse repo rate by 10 bps to 2.45% and the Medium-Term Lending Facility injected USD43.9 billion into 17 financial institutions. The PBoC also raised the short-term lending facility rate by 20 bps to 3.3%. This is negative for the outlook for China’s onshore equity markets.

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