Asia FX Talk - US dollar stays firm as tariff risks loom

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Market Highlights

The broad US dollar index (DXY) bounced by 0.7% on Monday’s trading session following a 1.7% decline last week. This has partly been driven by ongoing political uncertainty in France over a parliamentary impasse in passing the 2025 budget, and partly by US President-elect Donald Trump’s tariff threats on BRICS nations. Marine Le Pen’s National Rally party (the largest in the lower house) has pledged to topple the French government after Prime Minister Michel Barnier used a constitutional tool to bypass parliamentary vote to push through part of his 2025 budget. EURUSD fell 0.7%, with the spread between France’s and Germany’s 10-year yield widening to 88bps. Euro-area manufacturing activity also stayed in contraction, with further weakness seen in Germany, France, and Italy. Meanwhile, US ISM manufacturing shows factory activity picking up to 48.4 in November, from 46.5 in October, but still staying in contraction. 

BoJ governor Ueda has hinted at a rate hike this month, sending Japan’s 2-year yield to 0.62% yesterday, the highest level since 2008, while its 10-year yield also rose 3bps to 1.08%. This has helped to support the yen, which has moved slightly below the 150.00-handle against the US dollar.  

Regional FX

Asia ex-Japan currencies weakened against the US dollar as Trump warned BRICS nations not to create a new currency as an alternative to the US dollar, or else they could face 100% tariffs from the US. CNH (-0.5%), KRW, (-0.5%), THB (-0.6%), and SGD (-0.4%) led losses in the region. Notably, the spread between offshore CNH and onshore CNY has widened, reflecting weak market sentiment on the outlook for China’s economy. The broad pickup in manufacturing PMI across Asia, notably a return to expansion for South Korea’s factory activity, has not lifted the cautious mood.

Despite weakness on Monday’s trading session, we maintain our outlook for the THB to end this year at 34.70/USD. Thailand’s inflation for November (to be released on 4 December) is likely to have picked up to 1.2%yoy in November, while Q4 growth will be supported by tourism and the government’s first phase of cash handouts. We keep our GDP growth forecast for Thailand at 2.9% in 2024. We also think the BoT has already made a pre-emptive rate cut move in October, so the central bank will likely hold the policy rate unchanged at 2.25% in the December meeting.

Meanwhile, Indonesia’s headline inflation was 1.55%yoy in November, down from 1.7%yoy in October. This was slower than our 1.7% expectation but higher than Bloomberg consensus of 1.50%. The weaker CPI print relative to our expectation has somewhat reinforced our view that Bank Indonesia will resume cutting rates by 25bps in December amid slowing domestic growth and our expectation for US Fed to cut rates by 25bps this month and USDIDR to stay at around 15,900 by end-year.