Asia FX Talk - A breather for regional FX, but headwinds remain

Ahead Today

G3, UK: NY Fed 1y inflation expectations, France election results

Asia: Singapore foreign reserves, Indonesia consumer confidence

Market Highlights

The DXY US dollar index has fallen following soft labour market data, breaking the 50-day moving average (DMA). The main disappointment for markets stems from an uptick in the unemployment rate by 0.1ppt to 4.1% vs. Bloomberg consensus for just 4.0%. Meanwhile, nonfarm payrolls gained 206k in June, slowing from a downwardly revised 218k in May (272k before revision), though beating Bloomberg consensus for 190k. The average hourly earnings growth also eased to 0.3%mom (+3.9%yoy) in June from 0.4%mom (+4.1%yoy) in May. But notably, there has been little change in market expectations for the number of US rate cuts this year, which remain at 2. Given a light US macro data calendar today, US dollar weakness could be capped by the 200DMA.

The second and final round of legislative election in France saw a high voter turnout. Early polls suggest a left-wing coalition is on track to win the most seats, of between 172-210 seats, but still short of the 289 required for an absolute majority. President Macron’s party is set to place second with about 150-175 seats, while Marine Le Pen’s far-right party is expected to come in third with about 113-155 seats. While this is a surprise, the likely scenario is still a hung parliament, making it difficult for either party to push through legislation. But for now, it appears market stress about the French election has receded, with the OAT/Bund spread narrowing to less than 70bps, from a peak of about 80bps, while the euro has rebounded. 

Regional FX

Asian FX took a breather on the back of broad US dollar weakness, with USDCNH falling below the 7.3000 level, IDR retreating from its 4y low, while the SGD gained 0.6% over the past week. The economic data docket for the US and Asia are light today, suggesting there may not be much impetus for big moves in regional currencies. The risk for Asian currencies, though, remains skewed to the downside, with the Fed staying patient while market expectations of 2 US rate cuts this year have not changed despite the softer ISM services index and jobs report.