Asia FX Talk - A weaker CNY ahead of Trump’s inauguration

Ahead Today

G3: US: S&P Global US services PMI, factory orders, durable goods orders; eurozone composite PMI

Asia: China Caixin services PMI, Vietnam’s Q4 GDP and CPI, Thailand’s CPI

Market Highlights

The broad US dollar index (DXY) fell by 0.4% last Friday. Several G10 currencies strengthened against the US dollar, including the EUR (+0.4%), JPY (+0.2), GBP (+0.3%), SEK (+0.4%), and CHF (+0.4%). US ISM manufacturing PMI picked up to 49.3 in December, from 48.4 in November, on the back of an upside surprise in new orders. The new orders sub-index rose to 52.5, from 50.4 in November. However, overall factory activity in the US remained in contraction. The ISM manufacturing employment sub-index also fell to 45.3, following a brief pickup to 48.1 in November, reflecting a decline in headcount at a faster pace. This also suggests that manufacturers expect goods demand to decline in the coming months.

Meanwhile, emerging market currency index fell for the fifth straight week, impacted by the stronger US dollar and CNY weakness. USDCNY rose beyond 7.3000 level after authorities had defended that level for weeks. The PBOC has set the USDCNY daily fixing rate at 7.1878 to contain the pace of currency depreciation. The upper bound of the USDCNY trading band is now at 7.3316, which is only 0.14% above last Friday’s closing spot rate. Additionally, the US dollar will also likely be supported by elevated US treasury yields, with the 2-year and 10-year yields staying above 4%. 

Regional FX

Asian ex-Japan currencies were broadly weaker against the US dollar, despite broad US dollar weakness. MYR, PHP, and THB led losses in the Asian region, with each of them declining by 0.5% against the US dollar last Friday. We maintain our outlook for weaker Asian currencies leading up to Trump’s inauguration on 20 January, with “Trump trades” persisting in anticipation of US tariff hikes.

Meanwhile, in Singapore, seasonally adjusted retail sales fell 2.8%mom in November, snapping the past 4 months of growth. Broad-based weakness was seen across different product categories, with motor vehicle sales falling 7.7%mom and non-motor vehicle categories declining by 2.1%mom. From a year ago, Singapore’s overall retail sales were down by 0.7%. With retail sales falling, trade headwinds rising, and core inflation returning to under 2% (1.9%yoy in November), we think there’s no compelling reason for the MAS to keep its tight S$NEER policy this year. A policy easing move could come as early as this month. 

In Thailand, we estimate that headline inflation will pick up to 1.4%yoy in December, partly due to favourable base effects for fuel and food prices from a year ago. This, along with an anticipated pickup in economic growth, should allow the Bank of Thailand to keep its policy rate unchanged at 2.25% in the next monetary policy meeting in February.