March has seen an overall rise in risk appetite that has benefitted Asian currencies quite significantly. While a more dovish outlook for US interest rates and greater stability in the oil markets have helped create this environment, greater clarity on the RMB has also likely been a key contributor. It seems increasingly clear that the authorities in China are managing the RMB Index in line with the broad USD, with gradual depreciation in the RMB against the CFETS basket still likely to pan out over the next few months.

USD weakness has so far played out more against G10 currencies relative to Asian FX, although the latter has also seen quite a bit of strength. Within Asia, those currencies with a greater sensitivity to global moves, like the KRW and SGD, have been amongst the bigger beneficiaries in March. The MYR has also benefitted from the rebound in oil and some asset sales by a troubled state investment firm. The MYR’s 6.6% appreciation against the USD could though prove fragile given that increased political risk does not yet appear to have been priced in.

Talking Points:    

• Return of risk appetite has seen Asian currencies strengthen across the board but still lag DM currencies.
• We have adjusted our forecasts to take into account the changing environment.
• The rebound in the oil price seems to have stalled, Brent has retraced from highs of just below USD 42/bbl.
• China’s new FX regime appears to be getting clearer, with the RMB Index appearing to be positively correlated with the DXY.

For full analysis, download report: Essential Asia: The RMB Fog Clears (PDF, 3 MB)