Asia FX Outlook – Remaining Bullish On China
(9 min read)
- CNY to benefit from rising yield differentials and a strong recovery
- INR continues to defy dismal economic reality due to equity inflows
- KRW still underperforming despite a third fiscal package
- TWD upside limited by rising competitiveness concerns
- SGD lags recovery in risk appetite
- IDR under pressure from debt monetization plan
China Triggers Risk Rally
Increased confidence in a V-shaped recovery in China and a sharp rally in Chinese equities have boosted risk appetite across emerging markets. New COVID outbreaks in the US and elsewhere leave ongoing risks that renewed lockdowns will hurt the recovery. But with further measures likely to be localised and recent macro data pointing to a strong rebound in the US and other major economies, a material set back in global economic momentum seems unlikely.
Global equity markets have rallied, and broad dollar weakness has continued. Asia FX has strengthened; the Indian rupee has been the best performer in recent weeks with TWD also doing well (Chart 1). The Indonesia rupiah is the main outlier, with the Bank Indonesia-Finance Ministry announcement that the central bank will monetize government debt leaving the currency under significant pressure.
Second quarter GDP data will start to trickle out later this month (China 16 July and the US 30 July). Headline numbers will show unprecedented declines across the world, but what matters now is the scale of the third quarter bounce. Mobility data show activity normalising in many countries (although renewed COVID outbreaks in the US have seen mobility drop back), and Q3 data should confirm the rebound. But the shape of the recovery partly depends on how long fiscal support is extended. One recent positive is that job support/furlough schemes have been lengthened in some countries and new targeted sectoral relief announced.
Next Week’s EU Summit Key to Continued Risk Appetite
A 17-18 July EU summit to discuss the proposed €750bn EU Recovery Fund (5.4% of 2019 GDP) is the next significant global policy event. Agreement on timing, allocations, composition (loans versus grants) and conditionality may mean July is too soon for a final agreement. But assuming EU leaders retain commitment to a more coordinated fiscal approach and some concrete progress is made, broad risk appetite should remain well supported and Asia FX with it.
US-China tensions continue to simmer. The US may yet impose sanctions on banks doing business with Chinese officials linked to the crackdown on Hong Kong’s pro-democracy protestors, and a raft of other measures are threatened. Stepped-up geopolitical tensions will therefore remain a significant risk to global sentiment in the coming months.
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