Asia FX Talk - Markets - complacent on tariffs?

Ahead Today

G3: US Housing Starts, FOMC Meeting Minutes

Asia: Bank Indonesia Policy Meeting

Market Highlights

Marco Rubio, the US secretary of state, and Sergei Lavrov, Russia’s foreign minister, led delegations in a four and a half meeting in Saudi Arabia, agreeing to “lay the groundwork for future co-operation” on ending the Ukraine war. This was the first high-level talks on the conflict since the war started in February 2022. Nonetheless, Ukraine President Zelenskky said he had not been informed ahead of time about talks, and has said that Ukraine would reject any settlement that does not directly involve Kyiv.

Meanwhile, US President Trump said he would likely impose tariffs on automobile, semiconductors and pharmaceutical imports of around 25%, with an announcement coming as soon as 2 April. Trump said he also wanted to give companies time to shift manufacturing back to the US before implementing new import taxes. This also comes on the back of a tweet overnight by Trump reiterating his plans to implement reciprocal tariffs based on a range of criteria, including tariff differentials, non-tariff barriers, taxes, and exchange rates among others. To some extent, markets continue to view these tariff announcements with a skeptical eye and are perhaps calling Trump’s bluff with regards to the magnitude of actual tariffs being implemented. We think markets are perhaps too complacent at this point, and see FX vol potentially rising from here.

Regional FX

Asian currencies traded with a slightly weaker bias with USD/CNH rising to 7.278, with PHP (-0.55%), MYR (-0.3%), and VND (-0.2%) underperformed. Amongst Asia-ex-Japan markets, South Korea and Taiwan, coupled with India, Singapore, and Malaysia are probably most leveraged towards pharma, autos and semiconductor exports towards the US, but of course a lot will depend on how exactly Trump implements tariffs on these sectors.

Meanwhile, Singapore announced its 2025 Budget yesterday, with a range of goodies and cash handouts to help support various segments of its population, and with Elections to be held sometime later this year. The Budget had many forward looking elements as well beyond short-term support for the economy, including on supporting nuclear energy, semiconductors and AI, upskilling of the population, together with climate change adaption. Overall, many political analysts are speculating that the Elections could be held in May or July this year, and it will be closely watched to see how new Prime Minister Lawrance Wong performs in his 1^st Election since taking office.

Bank Indonesia will hold its policy meeting later today. Consensus and ourselves are expecting no change in the policy rate, but with a decent minority expecting a cut. The guidance and tone of the meeting could also be important, with a dovish hold likely to signal cuts at some point in time this year. This meeting also comes on the back of a announcement that Indonesia will require natural resource exporters to keep all foreign exchange earnings onshore for a year, from the previous requirement of 30% FX earnings for 3 months. The government and central bank estimates that up to US$80bn of FX earnings may be held onshore with these rules, and if this helps maintain rupiah stability moving forward, should provide policy space over time for BI to cut rates this year at some point.