Asia FX Outlook – Intervention To Cap Further TWD Gains
(9 min read)
- TWD outperforms on foreign equity inflows, but intervention could limit further gains.
- KRW lags due to a subdued recovery.
- CNY remains stable to strong despite rising geopolitical tensions.
- Poor macro and RBI not enough to generate INR weakness.
- SGD follows global risk appetite.
Risk Volatility Takes Asian FX Along With It
Markets have been on a bumpy ride over the past two weeks. Ongoing policy stimulus and relaxation of COVID lockdowns continue to buoy risk appetite. But new COVID outbreaks in the US, Germany and China leave ongoing concerns that the global recovery could yet be derailed. A brief equity correction and bout of risk aversion pulled Asian currencies weaker in mid-June alongside other EMFX. But markets have since stabilized and a bounce back in activity data has, for now, allayed concerns over any material threat to the economic recovery.
USD strength from a fortnight ago has reversed, and markets have resumed their positive momentum. FX performance has not been uniform across Asia, however, with the Korean won and Indonesian rupiah lagging others in the region, both down 1% since 11 June. The Taiwanese dollar has been the outperformer with a small gain (Chart 1).
Asia Export Outlook Turning More Positive
While attention is focused on how quickly the global economy can bounce back from the COVID lockdowns, the overall magnitude of the decline continues to be marked lower. Updated IMF forecasts saw this year’s global growth projection reduced to -4.9%, from the -3% predicted in April. But for Asia’s export-orientated economies, this week’s WTO update – noting global trade avoiding the pessimistic scenario set out earlier in the year – should be welcome news. The WTO had assumed a trade elasticity to GDP growth in line with the GFC, but in fact the response looks to be lower. A sizeable policy response to the crisis, protracted declines concentrated in non-tradeable services and resilience in sectors such as electronics are key reasons for the more upbeat assessment.
Policymakers nevertheless remain cautious given the uncertainty over the recovery. Fed Chair Jay Powell told Congress last week that despite recent better-than-expected data on retail sales and unemployment, he expects the US economy will take several years to return to full capacity. And as the Fed shifts its focus away from large-scale asset purchases and towards credit to the nonfinancial sector, we see some risks to our bearish dollar call and by extension Asian FX. But with US yields firmly anchored, Asia’s high yielders should remain attractive.
TO READ THIS HIVE EXCLUSIVE
SUBSCRIBE TO MACRO HIVE PRIME