Essential Asia: Appreciating Asian FX Appreciation
Focus is now on whether the interest rate differentials between the US and Asia will start to matter for Asian currencies.
The end-June FX forecasts are looking overly bearish on Asian currencies. The divergence between these forecasts and where the currencies are at current levels are biggest in the KRW (-6.8%) and MYR (-4.3%). The persistent decline in the DXY index and the additional 3.8% slide in Q2 this year have essentially erased all the gains in the USD since US presidential elections last November. The lack of conviction in the US Federal Reserve’s policy path has negated the scope for interest rate differentials with the US to matter for Asian currencies movements. On top of that, China has managed to deal with the capital outflows situation quite effectively and the risks to further RMB weakness have been mitigated
- RMB stability is expected to be restored after recent bout of volatility, even though tight CNH interbank liquidity could persist.
- Focus is expected to return to the Fed’s policy path beyond the June hike and whether the interest rate differentials between the US and Asia will start to matter for Asian currencies.
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