Weaker risk sentiment ahead of payrolls

Week Ahead FX outlook:

Asian FX were generally weaker last week, on the back of weaker global equity risk sentiment, weaker than expected China manufacturing PMI, coupled with modestly hawkish Fed speak. The weaker equity sentiment comes in part on the back of recent softness in US data, with personal spending growing less than expected, albeit also coupled with a decent PCE deflator estimate for April. Meanwhile, China’s manufacturing PMI was weaker than expected at 49.5 from 50.4 the previous month, indicating continued challenges in supporting the Chinese economy amidst challenges in the property market.

The capital flows data for Asia were also not supportive last week, with close to US$7.8bn of equity market outflows led by weakness in South Korea and Taiwan, while Northbound flows into China’s onshore markets saw around US$0.8bn of net selling.

On the global front, markets will focus on key highlights including US non-farm payrolls, US ISM, together with the ECB policy decision. While we expect the ECB to start its rate cut cycle in its policy meeting this week, greater emphasis will be placed by markets on any guidance on the rate path moving forward (see Europe Macro: ECB preview).

Over in Asia, markets will focus on the official results for India’s 2024 General Elections out on 4 June, RBI’s monetary policy decision, several inflation datapoints including from the Philippines, coupled with trade data from China and Taiwan. Exit polls indicate that PM Modi is likely to receive a stronger mandate compared with the 2019 elections, and if that is right, it would likely result in INR strengthening, coupled with an improvement in risk assets as markets price for the possibility of more structural reforms.

There have been modest jitters as India's General Elections started