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 pragmatic 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.
The softer US dollar and interest rate environment will continue to support the INR 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 and 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 0 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, and the data will likely weigh large in 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 remain a concern, the outlook remains uncertain. But 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 liberalisations 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 favourably until the war clouds dissipate.