The Asian currencies market has demonstrated a shift from being sensitive to interest rate differentials with the US to reduced expectations that the wider differentials will be meaningful in a sustainable manner. That the latest bout of strength in Asian currencies happened despite a weaker JPY and firmer US Treasuries yield signifies the restoration in confidence for Asian assets. Firmer commodities prices, namely oil, may be a deterrent, but will probably have Asian central banks more tolerant towards some appreciation in Asian currencies in the face of rising risk of supply side price shocks.

Key points

• Investors shed concerns over widening interest rate differential between Asia and the US.
• Geopolitical risks appear to be easing as South Korea and China mend ties and Sino-US relationship may warm further after Trump’s visit.
• Adjustments to Asian currencies outlook for 2018 will probably be along the line of reduced bearishness vs the USD.
• Beijing has removed foreign ownership caps on banks and AMCs but the primary goal is more likely the modernization of the financial sector.

For full analysis, please download the report: Essential Asia: Selective Optimism (PDF, 806 KB)