Asia FX Talk - Trump trades dominate

Asian FX has continued to weaken against the US dollar on market expectation for US tariff hikes.

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Market Highlights

“Trump trades” have continued to dominate markets following the US presidential election on 5 November. The broad DXY US dollar index has gained 2.2% since 5 November. Meanwhile, EURUSD fell 2.7% and USDJPY rose 1.4%. The US yield curve has also bear flattened, as markets pare back expectations for the pace of US Fed rate cuts to just 73bps through 2025, versus 117bps on 5 November. The US 2yr yield has risen by about 14bps since the US election day, versus a 9bps increase in the 10-year. Asian currencies that are CNY-linked and more sensitive to high US yields have also been the more impacted.

What is critical now is the direction of policies under the Trump administration. Some of Trump’s policies, particularly trade policies, could be inflationary and hurt global growth. But some other policies could be pro-growth, such as corporate tax cuts leading to more investment with positive spillover effects on the global economy. The sequencing of those policies will thus matter a lot. We think this time around, unlike during Trump’s first term in office, trade tariffs could be the first few policies implemented, given they do not need congressional approval. The growing prospects of a Republican Congress would also give Trump broad powers to enact other policies like deregulation and tax cut, though the positive impact on US investments will take time. Meanwhile, Donald Trump’s cabinet continues to take shape as he leans on allies and China skeptics to fill key appointments. Trump could tap on Marco Rubio as the Secretary of State and Mike Waltz as national security advisor.  

Regional FX

Asian FX has weakened against the US dollar on market expectation for US tariff hikes. THB (-3.6%), CNH (-2.1%), MYR (-2.1%), KRW (-1.9%), and SGD (-1.7%) are leading losses in the Asia region since the US presidential election on 5 November. These currencies are vulnerable, given they are more exposed to global trade. Onerous tariff hikes by Trump could severely disrupt global trade and supply chains. In Thailand, the Thai baht is also facing a double whammy from potential tariff hikes and the likely appointment of Finance Minister Kittiratt Na-Ranong as the new BoT chairman, who’s looking for a lower policy rate. Elsewhere, in Malaysia, while the domestic outlook is positive, driven by investments and fiscal consolidation, a potential tariff hike could dominate in the short term, weakening the MYR. In Singapore, the MAS is likely to ease its tight exchange rate policy in January 2025 as the balance of risks shifts to growth. Meanwhile, while Indonesia’s economy is more domestic oriented, the IDR is vulnerable to a sustained period of US Dollar strength and high US yields.

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