The market’s response to the appearance of a rather contained contagion from Brexit has been a meaningful rise in risk appetite. This has been seen in both higher equity markets and stronger EM currencies, including Asia. This recovery in risk appetite might not prove too enduring, but for now it does not show any sign of abating. In Asia, this calm is also appearing to manifest in the form of China being more willing to allow the RMB to reverse the underperformance of the broad USD that had occurred over most of June in relation to Brexit. This closing of the RMB-USD gap should lead to the RMB appreciating against many of the smaller constituents of the CFETS basket, like the SGD.

While the latest development may underpin the broad USD’s strength, we will not rule out some differentiation in Asian FX movements. Domestic positives as well as high yields will likely support the IDR and INR, while commodities prices may influence the MYR to a greater extent. The KRW and TWD may be tracking the JPY. The CNY on the other hand, may be allowed to unwind some of the recent weakness which was likely a precautionary measure post Brexit.

• We are cognizant that the near term gyrations in Fed hike expectations for December this year could be de-stabilizing for Asian FX movements. However, further out, markets are expected to re-assess and potentially re-price the Fed’s tightening stance.
• Portfolio flows data showed the return of foreign investors since June and the momentum may persist for a while longer, making any USD strength in the near term vulnerable.
• We revise some of our Asian currencies forecasts, primarily removing some of the initial USD bullish tone in the short term.

In this issue

• How deep is your love (for yield)
• Re-assess, Re-price, Re-allocate
• China Spotlight: Policy finetuning
• Korea Spotlight: In favour, in debt
• India Spotlight: A vote for continuity at the RBI
• Singapore Spotlight: Holding the middle ground

For full analysis, download report: Essential Asia: How deep is your love (for yield) (PDF, 2.9MB)