Asia FX Weekly - Wait for US August payrolls numbers

Week Ahead FX outlook:

Asian currencies have gained 0.6% on average against the US dollar this week. In particular, JPY (+2.5%) has led gains across the region. Notable gains were also seen in VND (+1.1%) and THB (+0.8%). We think Asian currencies are largely supported by several factors, in a longer term.

For one, external pressures from US rates will continue to ease with certainty. The US labour market has been cooling off, given weak ADP employment, JOLTS jobs opening, and the ISM services employment. Furthermore sever weakness in the US labour market could only lead to more aggressive policy rate cuts by the Federal Reserve Bank. Meanwhile, US 2-year yields have continued to fall towards 3.7%. And during the week, we have seen a brief dis-inversion of the 2-10 US treasury yield curve on 4 September, only for that to invert again modestly on the back of a faster pace of declines in the US 10-year yield.

Brent prices have also fallen sharply to US$73/barrel, from US$80/barrel. With most Asian economies reliant on oil imports, the drop in oil prices will help improve their terms of trade and provide a buffer for their currencies. Moreover, falling oil prices, along with recent currency strength, should help limit imported inflation and passthrough to CPI inflation. In addition, the Chinese yuan has strengthened to around 7.0828 with positive spillover effects on regional currencies, underpinned by a stronger CNY fixing that continues to contain depreciation expectations and policy stimulus.

Next week, economic data will be quite China-centric, with inflation and money supply on 9 September, trade numbers on the following day, and monthly activity data (retail sales, industrial production, fixed asset investment) on 14 September. It’s clear that the Chinese economy is still facing headwinds. But a weaker than expected China inflation and activity data could be a drag on regional currencies, and possibly stall/slow their pace of appreciation. The economic surprise index for China has been negative since June, while credit impulse has been negative.   

China's economy has been flagging, though credit impulse showing some pick-up