Asia FX Weekly - Divergence Driving Dollar Strength

Week In Review: A confluence of a hotter than expected US CPI print, diverging central bank policies, coupled with geopolitical concerns led to the US Dollar strengthening meaningfully by 1.7%, a spike in US yields above 4.5%, coupled with some risk-off sentiment. These global factors certainly impacted Asian currencies and markets. Currencies with stronger historical correlation with the Dollar such as KRW, SGD and TWD underperformed during the week. Indonesia was closed for holidays, but will likely see some weakness this week given IDR’s high sensitivity to US yields. Meanwhile, CNY was stable as authorities maintained the onshore fix with the Renminbi still close to the top of the trading band. INR and THB also outperformed with decent equity inflows for both, while the Bank of Thailand resisted calls to cut rates amidst better clarity on fiscal stimulus such as the digital wallet policy and in the property market. 

Capital Flows: The spike in US yields and the Dollar impacted inflows into Asia’s local currency bond markets, with South Korea in particular seeing a meaningful slowdown in bond flows. China’s equity markets had US$1.5bn of outflows, which led to more than 2% drop in onshore stock markets, while a US$1bn foreign inflow into South Korea’s equity markets was not enough to prevent the stock market from declining more than 1% and weakness in the KRW.

Week Ahead: With US inflation remaining sticky and ECB diverging from a hawkish Fed, our global FX team is now calling for Dollar strength over the next one to two months, with the possibility of EURUSD heading towards 1.050 (see FX Weekly – USD has scope for further gains). While we had highlighted some positive macro developments in Asia such as improving exports, the AI chip boom, moderate inflation, coupled with resilient domestic demand, the stronger Dollar our global team forecasts will no doubt impact Asian FX (see Asia FX Quarterly 2Q2024 – Light at the end of the tunnel). Markets will key in on China’s monthly data out this week to validate green shoots in the economy.

The US Dollar strengthened meaningfully as markets priced out fed fund rate cuts over the next two years.