Week Ahead FX outlook:
Key FX views:
We expect next week’s FOMC and BOJ meetings to reinforce a more differentiated Asia FX environment, particularly at a time of higher crude oil prices. Asian currencies with strong external balances are likely to stay more resilient relative to those with trade deficits.
While the Fed is widely expected to stay on hold, the combination of elevated US yields and a potential 25bps BOJ rate hike imply a tightening of global liquidity. In particular, a BOJ tightening would reduce one of the world’s cheapest funding sources and raises the risk of an unwinding of yen-funded carry trades.
Brent above $100/bbl further amplifies the divergence in currency performance across the region. Higher oil prices represent a negative terms-of-trade shock for net energy importers such as Thailand, the Philippines and India, while net commodity exporters including Malaysia and, to a lesser extent, Indonesia could receive some offsetting support against the oil shock. Meanwhile, Asia’s robust electronics cycle should continue to underpin tech exporters, particularly Korea Taiwan, Malaysia, and Singapore.
For Asia FX, the implication is that leadership is likely to stay with defensive and externally resilient currencies, such as KRW, TWD, SGD, and MYR. In contrast, THB and INR for instance appear vulnerable to the combination of elevated oil prices, rising US yields and reduced global carry appetite.
Next week’s policy meetings are unlikely to determine the direction of Asia FX as a whole, but they could determine which currencies emerge as winners and losers in an increasingly fragmented market environment.
