Week Ahead FX outlook:
The US dollar has had one of the worst weeks in years, falling by 3.7%. Markets have continued to shift their focus away from US tariff rhetoric for now, with US President Donald Trump deciding to exempt the 25% tariffs on Canada and Mexico for those goods covered by the US-Mexico-Canada free trade agreement (USMCA). This exemption will last till 2 April.
Markets could continue to shrug off tariff threats in the week ahead with a continued focus on a potential slowdown in the US economy. Incipient signs of economic weakness in the US have emerged, as reflected by a weaker than expected ADP employment data and a decline in both the ISM manufacturing new orders and employment sub-indices. Many Asian currencies have gotten near-term reprieve on the back of recent broad US dollar weakness.
The week ahead also promises to be an eventful one, with key CPI data in the US and China. Market expectations are for US core CPI inflation to ease somewhat to 0.3%mom in February, from 0.4%mom in January. Efforts to improve government efficiency via overhauling the federal workforce could also cool the US labour market and wage growth pressures. Job-cut announcements more than doubled in February from a year ago. And in China, February’s CPI data will likely remain subdued. This, along with a 5% growth target that was being announced during the National People’s Congress on 5 March, imply the Chinese government will have to do more on the monetary and fiscal front to reflate the economy.
In addition to that, the release of February’s US nonfarm payroll data on 7 March could also have implications for Asian currencies in the week ahead. Should there be a negative US economic surprise, it would reinforce market expectations for a US economic slowdown, keeping the US dollar under pressure. This will come at a time when the euro has been lifted by Germany’s plans to boost fiscal spending, while the yen has been backed by narrowing yield differentials with the US.
Asian FX have gotten reprieve at the US dollar's expense
