ASIAN FX UPDATE: Asian FX was rattled overnight in the wake of doubly-disappointing Chinese PMIs. However, losses were short-lived with EMs gaining against the US Dollar into Tuesday’s European session as investor await Wednesday’s all-important Fed policy review.
Commenting on the implications of the Fed for risk assets such as Asian EMs, NZ economist Felicity Emmett wrote “A sustained acceleration in core inflation remains elusive and is contributing to low inflation expectations. This is not just an issue for the FOMC, it is a real concern for other major central banks,” adding “We expect the dovish tone from central banks to continue for the foreseeable future. Given evidence of a recovery in growth, this is very positive for risk assets.”
Senior Asia economist, Prakash Sakpal, commented on the overall tone of Asian FX into Tuesday’s session, stating “Positive sentiment from the solid report from the US may drive buying momentum although investors will also take a cue from China’s manufacturing report. Meanwhile, trade talks between the US and China resume this week with Secretary Mnuchin hoping this round seals the deal.”
Looking to specifics, the latest Thai manufacturing index and balance of payments figures are due today which should give some indication as to first quarter GDP growth. Yesterday saw the Thai finance minister trim GDP growth expectations for the year ahead from 4.0% to 3.8% given slower-than-expected export growth.
Asian FX and a basket of EMs saw out last week generally down versus the Greenback following the latest round of US GDP growth data which, printing well-above forecast, prompted a paring of expectations of Fed policy easing.
Commenting on the currency market impact of broad-based greenback strength, Maybank analysts wrote ” The strength of the USD weighed on the AXJs last week with the KRW, IDR and INR the worst performers against the USD last week.”
Printing at 3.2%, substantially higher than the consensus forecast for a 2.2-2.3% print, gross domestic product growth for the US ticked unexpectedly higher in the first quarter of 2019.
For Asian FX and EMs, 2018 saw exchange rates muted in the face of rising policy rate differentials with the latest release dashing expectations for a rate cut on the horizon and prompting concerns over further EM suppression in the year ahead. 
Given the considerable impact of the Fed’s policy on global currency markets, a key focus Asian FX this week will be the latest Federal Reserve monetary policy releases with the Federal Open Market Committee (FOMC) set to release their latest review of policy on Wednesday. Given the Fed’s focus on personal consumption expenditure (PCE) as their key measure of inflation, Monday’s PCE releases will also be highlight for investors.
Maybank analysts added “US PCE Core and post-FOMC press conference by Fed Governor Powell will be watched for clues over the direction of rate adjustments.”
Monday’s PCE releases will see both February and March data releases with the most recent (March) figure expected to come in at 0.1% while consumer spending is forecast to have risen by 0.7% (m/m)
Commenting on the lowered expectations of a Fed rate cut, which would benefit Asian FX and EMs, ING economists wrote “There was a lot of pessimism at the start of the year with the government shutdown, global slowdown fears and an inverted yield curve heightening talk of Federal Reserve interest rate cuts and a potential US recession. However, a recent run of firm macro data and a robust corporate earnings season have eased those fears,” adding in light of said data that “we see little reason for the Fed to cut interest rates this year with the market seemingly moving in our direction given the re-steepening of the yield curve.”
Out with the impact of looming US data and the subsequent impact on the Fed’s rate path, Chinese data will also be in focus.
While recent GDP and industrial growth figures out of China have provided tentative evidence to suggest the soft-patch could be bottoming out, if it hasn’t already, subsequent data from other Asian EMs and also the Euro zone failed to replicate this uptick in activity.
Nevertheless, Tuesday’s Chinese manufacturing/non-manufacturing PMI releases will be of particular interest with investors looking for further confirmation of the “green shoots” narrative which has been abundant in market-related news-flow over recent weeks.
Maybank analysts wrote ” This week’s releases, including EU 1Q GDP and Asian PMIs, could see optimism rebound should there be signs of stabilisation in economic activities, especially from China,” adding “This together with the potential for a Sino-US trade deal could reinforce expectations of a recovery in green shoots and provide some support for the AXJs ahead” while in the interim, lingering market doubts over rebounding economic activity would dampen sentiment and weigh on Asian FX.
Both measures – manufacturing & non-manufacturing – are forecast to rise, reflecting an increased pace of expansion with median forecasts of 50.7 and 55.0, respectively.
Summarising their outlook on recent activity within the Asian FX sphere and expected developments, ING economists wrote “Investors will digest the latest upside surprise from the US with traders now turning their focus to the FOMC meeting and US jobs report later in the week. Select ASEAN economies will report trade and inflation numbers while China’s PMI on Tuesday may also drive trading direction.”
While the overarching themes of the Fed’s monetary policy path and a Chinese-led recovery are likely to impact the longer-term direction for Asian FX, near-term a number of idiosyncratic factors could prompt some volatility in specific crosses.
Singapore Dollar (SGD)
Despite a recent fall in industrial production (IP), which contracted in-line with the market consensus (by 4.8% y/y), an upwards revision to last month’s IP growth (from 0.7% to 2.6%) raised market hopes of an above or on-forecast first quarter GDP print, supporting the Singaporean Dollar versus its US counterpart through early Monday trading with USD/SGD last seen trading at SGD1.36150, down marginally from the weekly open.
Furthermore, the reaffirmation by the Monetary Authority of Singapore (MAS) in the Macroeconomic Review indicated policymakers still expect 2019 growth to fall within their forecast range of 1.5 to 3.5%.
In light of these developments but with the caveat that this week’s Fed and Chinese releases could set the tone for Asian crosses, Maybank analysts expect the current upside bias to fade.
“USDSGD rallied for most of last week amid a resurgence in USD strength. Attempts to break above the 200DMA at 1.3652-levels did not succeed and pair has slipped in consolidation mode ahead of a shortened week this week and key data/event out this week including regional PMIs, US inflation and FOMC decision,” they wrote, adding “Though risks are skewed to the upside, our bias remains to lean against strength.”
Thai Baht (THB)
For the Thai Baht, Monday’s session saw the THB trading flat against the USD ahead of the key PCE data releases. Aside from gloomy global growth weighing on Asian FX, domestic data has also limited upside for the Baht with the latest round of tourism statistics continuing a run of weak data. According to the Thai Tourism Board, tourist arrivals fell by 0.7% over the previous 12 months with spending (by tourists) down 1.3% in March – the worst reading in two years.
Commenting on the release, ING economist Prakash Sakpal wrote “The slowdown in visitors from China has been a drag in recent months. Blame the increased political uncertainty surrounding the first general elections since the 2014 military coup. Data supports our view of a slowdown in GDP growth to a two-year low of 3.1% in 1Q19 from 3.7% in 4Q18.”
Indonesian Rupiah (IDR)
Continued bullish momentum saw the US Dollar to Indonesian Rupiah exchange rate post a three-week high of IDR14212 during Monday’s session.
While acknowledging that bullish momentum remains intact from a technical perspective, upside for the cross is expected to curbed around the IDR1435-level as bullish momentum fades with some analysts tentatively predicting IDR upside once election results have been confirmed.
“Market continues to wait for official results regarding the 17 Apr elections. We cannot rule out renewed market optimism once Jokowi is officially confirmed as victorious and names pro-business, reform members of key economic ministries, especially Sri Mulyani at Finance,” wrote MayBank analysts, adding “These should keep markets buoyant and encourage further inflows into both equities and Indonesian government bonds (IndoGB), supportive of the IDR higher.”
Scotiabank FX strategist (Asia), Qi Gao, was also upbeat on the Rupiah’s prospects near-term, “USD/IDR is approaching the 100-day moving average resistance. In the medium term, the pair will trade lower with foreign investors chasing higher yields. The BI left its policy rate unchanged at 6.00% on Thursday afternoon and said the IDR is still undervalued.”
Turkish Lira (TRY)
Having risen to it’s highest level since October 2018 (the post-Lira-rout correction) last week, the US Dollar to Turkish Lira exchange rate failed to extend gains to the upside, instead drifting lower ahead of the crucial US PCE releases.
At the time of writing, the USD/TRY was last seen trading at 5.92695, down a shade from the weekly open.
The Lira has been buffeted recently with both domestic and global political risks weighing on investor sentiment.
Commenting in the wake of last week’s decision from the Central Bank of the Republic of Turkey (CBRT) to keep rates on hold and cut policy wording leaning to a tightening bias, former CBRT deputy governor, Ibrahim Turhan, said the Lira’s depreciation was in part due to low investor confidence in economic decision-making and the reliability of economic data.
Weakening of TRY is related basically to the deterioration of risk perception due to lack of confidence in the integrity of economic policies and the reliability of data, as well as elevated political tension due to developments in international relations https://t.co/GMeHWZ9vjF
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