Asia FX: Diverging paths under Dollar strength – MUFG

MUFG’s Lloyd Chan highlights that external pressures on Asia FX persist as the US Dollar and US Treasury yields stay firm, with markets fully pricing another Fed hike by October. He notes that most Asian currencies have weakened against the Dollar since the June FOMC, but domestic fundamentals and central bank actions are set to drive divergent performances across the region.

Regional currencies under external pressure

"Most Asian currencies have weakened against the US dollar since the 18 June FOMC meeting."

"In Indonesia, rupiah volatility has eased considerably following Bank Indonesia's intensified support measures, including policy rate hikes and higher SRBI yields. Nonetheless, the rupiah remains sensitive to higher US yields."

"Meanwhile, the domestic macro backdrop has become somewhat less supportive. Manufacturing activity contracted in June, exports fell 5.8%yoy, the trade balance recorded its largest deficit since April 2019 in May, and inflation rose to 3.3%yoy, moving closer to the upper bound of BI's 2.5%±1% target range."

"As for the Malaysian ringgit, BNM's efforts to encourage government-linked companies and exporters to repatriate overseas earnings have helped limit disorderly currency movements. However, political risks are likely to move increasingly into focus. With the 11 July state election approaching, we could see a modest election-related risk premium being priced into the ringgit in the near term."

"In Thailand, inflation moderated further to 2.4%yoy in June, although signs of underlying economic stress persist. Non-performing loan ratios have continued to deteriorate across several key sectors, highlighting ongoing vulnerabilities in the domestic economy. We continue to expect the BOT to keep the policy rate unchanged at 1.0%, which weighs on the baht's relative carry attractiveness."

"In the Philippines, the peso continues to face headwinds from slowing economic growth, inflation that remains elevated at above 6%, and relatively subdued capital inflows. Further BSP tightening is likely to remain supportive in containing inflation pressures and helping to support the currency."