The beginning of the end, or the end of the beginning?

Week Ahead FX outlook:

It was certainly a week in markets full of fireworks, with four key announcements - from the Bank of Japan, the Fed, China’s Politburo and the Bank of England. The Bank of Japan decision was hawkish, with an explicit bias to tighten further conditioned on the data endorsing BOJ’s forecasts. This gave the go-ahead for the Japanese Yen to strengthen further. Meanwhile, the Fed was dovish, explicitly emphasising its dual mandate of both inflation and the labour market in the statement, and also highlighted that a September rate cut is a done deal if nothing goes horribly wrong in the totality of the data.

Overall, lower-yielding Asian currencies strengthened sharply as USDJPY and US yields fell, perhaps partly reflecting unwinding of carry trades even as global risk appetite was decidedly weak. The epitome of this in our region is probably the Malaysian Ringgit - which has gone from zero to hero - and is now the best performing currency in Asia year-to-date in a heartbeat. Meanwhile, currencies such as the Thai Baht, the Korean Won, and the Sing Dollar have also done well.

To some extent, these trends are in line with our 3Q2024 Asia FX Outlook, where we highlighted a potential turning point as the Fed cuts, coupled with our preference for SGD, MYR and THB (see Asia FX Outlook 3Q2024 – Expecting a turning point). Nonetheless, the extent (and timing) of the move have admittedly caught us by surprise. Our latest updated forecasts are found here (see Global FX Monthly – August 2024). Our base case is for modest Dollar weakness moving forward as the Fed cuts and global growth improves gradually. The global growth aspect of the US Dollar smile is currently getting more attention with the fall-off in industrial metals and risk assets, and this is something to closely monitor.

Apart from the Japanese Yen, the Malaysian Ringgit FX pair against USD had continued to fall sharply