Asia FX Weekly - The Elephant in the room

Week Ahead FX outlook:

20^th Jan is the big day – the day of Trump 2.0’s inauguration and the start of his new administration, which will likely herald big changes in policies including on tariffs and immigration. To some extent, markets including in Asia FX have already moved quite a lot in anticipation of this event, and so it would not be surprising if we see some near-term pull back in Asian currency weakness. Nonetheless, our expectations more broadly are for Trump 2.0 to be much faster and bolder in tariff implementation, including a phased 20ppts increase in US’s average tariffs on imports from China. In this context we think there is scope for further weakness in Asian currencies from here.

Amidst this key event, China’s Q4 GDP growth came in better than expected for Q4, but data for December was a mixed set, with retail sales and industrial production both surprising on the upside, and FAI and property sector investment missing the expectation. There was certain fragility in the details of December data. Stronger IP growth was helped by the strong exports, slower expansion of retail sales showed a moderation in the consumer’s response towards government’s various trade-in programs. Trump’s trade policies cast large headwinds for Chinese economy ahead. We see a slower growth of 4.5% for China in 2025, with the help of further sizeable policy stimulus.

Meanwhile, Asian central bank action remains quite disparate amidst the cross-currents. Both Bank Indonesia and the Bank of Korea surprised markets this week, the former cutting rates on the back of growth concerns, while the latter holding rates given currency weakness and political uncertainty. For BI, the rate cut was surprising in the broad context of its mandate for Rupiah stability.

The Indonesian rupiah is not out of the woods