Eye on the Fed meeting

FX views: Most emerging Asia currencies retreated last week on a stronger dollar, with the KRW and TWD underperforming among regional peers. The CNY fell marginally, with the support from PBOC’s continued setting of stronger-than-expected yuan fixing and relaxation of macro-prudential measures, offsetting some of the pressures due to the country’s disappointing key economic indicators for June. In near term, we see interest rate differentials to continue weigh on Asian FXs, given the expectations that Fed will continue to raise rates this week.

Week in review: China’s GDP growth edged up to 6.3%yoy in the second quarter from 4.5%yoy in the first quarter, but sequential growth declined to 0.8%qoq. This June, in year-over-year term, IP growth improved marginally, while retails sales growth, growths of YTD FAI and YTD property investment fell compared with May. Taiwan's -24.9%yoy export orders growth in June surprised negatively, exports growth of Indonesia and Malaysia in June fell compared with May.

Central bank monitor: China kept its 1-year and 5-year loan prime rates unchanged at 3.55% and 4.2% respectively, but started to push back more forcefully against a weaker CNY through stronger fixing and relaxing some rules on overseas borrowing. We expect Bank Indonesia to keep rates on hold.

Week ahead: It’s a busy week, with the Fed, ECB, and BOJ policy decisions due. We expect both the Fed and ECB to hike, and markets will watch closely for any commitment on further rate hikes. Meanwhile, speculation of a BOJ YCC policy change for the July meeting has swung wildly over the past 2 weeks. Ultimately, we think it’s just a matter of time before BOJ changes YCC and see JPY strengthening sharply when that happens. South Korea and Taiwan will release their Q2 growths, we expect a mild improvement for both economies. China’s industrial profits for June, June CPI inflations for Singapore and Malaysia, Thailand’s June trade numbers are key to watch.

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LARGE FOREIGN CAPITAL OUTFLOWS RESUMED IN CHINA’S STOCK MARKETS LAST WEEK

Sources: Bloomberg, MUFG GMR