Focus moves to China’s Third Plenum

Week Ahead FX outlook:

Asian FX were generally stronger against the Dollar, helped by the lower-than-expected US CPI this week coupled with a string of somewhat softer US economic datapoints over the last few months. With that, the Fed Fund futures market has now moved to fully price in a Fed rate cut for September, while also expecting the policy rate to fall below 4% by 2025. Meanwhile, the sharp move lower in USDJPY below 160 was also helpful in relieving some pressure off Asian currencies – with intense speculation it was catalysed by FX intervention from Japanese authorities.

The road ahead for Asian FX remains somewhat foggy, but a near-term window may have opened up for some modest relief against Dollar strength given some fading of French Election risks and with stretched short JPY positions readjusting. This is at least until the spectre of tariffs hikes from a possible Trump administration and Republican sweep start to affect markets perhaps in the months to come.

Next week, China’s Third Plenum held from 15-18 July, coupled with the monthly economic data will take centre stage in Asia. Expectations for the meeting on long-term economic reforms are already quite low, and we do not expect any big bang reforms out of the Third Plenum. There should be a continuation and scale-up of policy direction to help reduce left-tail risks in the economy (tackling the “most urgent things”), coupled with continued moves to increase upside potential for the country’s long-term potential (shifting to “new quality productive forces”). Meanwhile, markets will also watch if there are any reforms to tackle long-term fiscal challenges, such as greater risk sharing between local and the central government and consumption tax reforms. Ultimately, we will unlikely get specific policies, and these may only gain better clarity from the end-July Politburo.

The Dollar saw some near-term relief on the back of greater pricing for Fed fund rate cuts into 2025