Asia FX Talk - Regional FX weakness could persist

Ahead Today

G3: US initial jobless claims, existing home sales, leading index

Asia: Indonesia current account, HK CPI

Market Highlights

The broad US dollar index (DXY) rose 0.4% to 106.68 on Wednesday’s session, erasing the prior 2 days of losses. US Treasury yields also stayed elevated, with the 2-year at 4.31% and the 10-year at 4.41%. The bulk of US dollar strength was contributed by a 0.5% drop in the euro. This was despite eurozone wage growth picking up to 5.4%yoy in Q3 from 3.5%yoy in Q2. Markets still look for the ECB to cut rates faster than the Fed through 2025. An ECB report published on Wednesday also showed banks in the euro area are vulnerable to a sudden US dollar funding squeeze, given a rise in their US dollar funding via the wholesale market and their expanding role as a net US dollar liquidity provider to non-banks in the bloc.

Meanwhile, USDJPY has continued to trade at the 155.00-level, as markets expect a slower pace of fed rate cuts (about 75bps through 2025) and only gradual rate hikes (+45bps through 2025) by the BOJ. Any yen strength could be limited. Moreover, Japan’s CPI could ease further to 2.3%yoy in October, from 2.5% in September. 

The key US macro data highlight today is the initial jobless claims, which could remain historically low. This would suggest a still resilient labour market, possibly giving impetus for the DXY index to strengthen further.

Regional FX

Asian ex-Japan currencies have largely been consolidating against the US dollar so far this week. But we think any reprieve for Asian currencies could prove to be temporary. The US dollar remains supported by still high US Treasury yields amid global uncertainties, while the PBOC has shown a willingness to tolerate a weaker CNY. USDCNY could push above the current key resistance level at 7.2470.

And in line with our expectations, there was no change to China's 1-year and 5-year loan prime rates yesterday. Bank Indonesia also kept its policy rate at 6.00% to help stabilize the rupiah amid a strong US dollar. We expect the rupiah will remain vulnerable in a sustained period of US dollar and see it ending this year at 15,900 per US dollar before weakening further to 16,250 per US dollar by Q1 2025 on the back of potential US tariff announcement. Market sentiment has turned sour with Indonesia’s net foreign bond outflows continuing over recent weeks. Indonesia's current account, to be released later, could also show a wider deficit of around US$3bn vs. a US$1.2bn deficit a year ago.