US presidential debate and data a key focus

Week Ahead FX outlook:

Asian FX markets continue to be driven by a meaningful tug of war this week. On the positive front, there are increasing signs of a softening US economy and with that lower US yields and a higher chance of Fed rate cuts this year, coupled with strong global risk appetite and surging AI stock prices. No company perhaps exemplifies this more than Nvidia, which for a brief moment sat on the pedestal and surpassed Microsoft to be the most valuable company in the world.

These positives have nonetheless been more than offset by a vortex of other forces such as global Election risks including in France and Mexico, weak sentiment towards Chinese assets, together with greater signs that global central banks outside of the US are pivoting more dovish including out of the Swiss National Bank and the Bank of England.

All these have spilled over to Asian currencies, but some more so than others. The Chinese central bank seems to be more willing to tolerate currency weakness, but the pace is still extremely gradual even as it releases some pressure off the valve. Meanwhile, the Indonesian Rupiah has been hit quite badly exacerbated by market concerns around the incoming President’s fiscal plans. Bank Indonesia has kept rates on hold in its meeting this week, but it remains a very fine balancing act. On the flipside, the Taiwanese Dollar has been relatively resilient on the back of a surge in equity inflows driven by global AI chip boom, with the stock market the best performing in Asia this year,

We think these tensions should eventually resolve themselves through a modestly weaker Dollar with greater confidence on Fed rate cuts, gradual global growth improvement, coupled with signs of stabilisation in the Chinese economy (see ChinaPulse – June 2024). We’ll get a plethora of US data this week including PCE inflation, personal spending and durable goods, which will be important to validate our thesis. Meanwhile, the 1^st US presidential election debate between Trump and Biden is on 27 June, and this will be held much earlier than usual compared with previous elections. Beyond specific policy pronouncements, markets will also focus on intangibles which could tilt the balance one way or another for the US Elections.

CNY has been allowed to weaken gradually over the past two months with higher USDCNY fix