Asia FX Talk - The many phases of Trump

Ahead Today

G3: US Retail Sales, US Import Price, US NAHB Housing, Germany Zew Expectations

Asia: 

Market Highlights

Markets continued to increase their pricing for a Trump Presidency and a Republican sweep, even as the focus thus far seems more on the positive growth implications of deregulation and fiscal stimulus, and less so on the left-tail risks of meaningful tariffs. Equity markets are up, with a rotation into US assets coupled with outperformance in small-caps relative to large caps, and also cyclicals relative to defensives. The US Treasury curve was steeper, building in higher term premia with expectations for Fed rate cuts also rising for this year on the back of softer inflation and labour market data. The Dollar was modestly stronger, with some dispersion in performance and underperformance in the likes of KRW and PHP. Whether the positive market risk sentiment can continue will certainly depend among other things on whether meaningful tariff risks become more salient as markets price for the many phases of Trump, coupled with of course the path for the Fed and also global growth.

On that latter point, Fed Chair Powell in his interview yesterday kept his cards relatively close to his chest in terms of timing of rate cuts, even as he said that the latest three inflation readings add “somewhat” to confidence on rate cuts, with risks to employment and inflation goals now more evenly balanced. Today’s US retail sales is as such also a key event risk, to gauge if the softening in US consumer health has continued.

Regional FX

Regional FX

Asian FX markets were mixed, with KRW (-1%) and PHP (-0.3%) underperforming, while the likes of MYR (+0.3%), THB (+0.2%) and VND (+0.15%) outperformed. The key development in our region was the much weaker than expected China macro data for June, with retail sales softening to 2%yoy from 3.7%yoy, together with a much lower than anticipated 2Q GDP growth number of 4.7%yoy (down from 5.3%yoy). Industrial production was the bright spot, rising 5.3%yoy, and in line with the improvement in export performance that we have already seen. Overall, the big picture is that the Chinese economy still remains in need of more stimulus, while more importantly, requires meaningful long-term reforms to turn market sentiment around. On that front, the Third Plenum happening this week together with the relevant statements and this month’s Politburo will be important, although we note that expectations for reforms are very low among market participants. Beyond China, we had trade numbers out of India and Indonesia, both of which were somewhat negative at the margin for their respective currencies. India’s services trade surplus moderated to around US$13.3bn from US$14.2bn driven by stronger services imports, more than offsetting a relatively flat goods deficit of US$22bn on a seasonally adjusted basis. Meanwhile, Indonesia’s trade surplus narrowed further to US$2.4bn in June from US$2.9bn the previous month, with weaker exports growth more than offset by a pickup in imports.