Most Asian currencies failed to profit from USD weakness
Most Asian currencies failed to profit from USD weakness last week. Exceptions to the rule were the Singapore dollar (SGD), Korean won (KRW) and Thai baht (THB), while the others moved sideways. Economic data in South Korea and Singapore beat expectations, which supported their currencies. Moreover, when the US fiscal deal was reached these currencies mainly profited from the improvement in investor sentiment. Chinese economic data came in around expectations, but nevertheless news of the acceleration in Q3 GDP still gave a boost to risk appetite. The Bank of Thailand left interest rates unchanged at 2.5% as widely expected and this had therefore limited impact on the THB. In India the central bank is looking at ending an emergency facility under which it has directly sold dollars to state refiners since late August. This weighed on the INR. We continue to favour the Chinese yuan (CNY) as our top Asian FX pick due to its resilience against external shocks and policy makers’ preference for a slow appreciation in the currency.
Lower USD/JPY on USD weakness
Currency markets had been paralysed by the US fiscal debate. In circumstances of risk aversion, the Japanese yen and the US dollar often outperform other currencies. But as the US was the epicenter of the market uncertainty, the dollar was under some pressure. Still, the Japanese yen rose, due to modest safe-haven inflows. Once politicians reached an agreement, USD/JPY moved temporarily higher. The fact that the USD “rally” has run quickly out of steam, has not been a positive sign for the USD. The optimism about the fiscal deal has faded. There is a sense that the deal merely kicks the can further down the road, and the next fiscal battle is already looming on the horizon. Indeed, the focus has now shifted to the damage of the shutdown and whether this will be large enough to prompt the Fed to further delay its tapering decision. As a result, USD/JPY moved lower driven by USD weakness and not JPY safe-haven flows. We have adjusted our 2014 USD forecasts, still reflecting a strong USD appreciation but merely reflecting that it may take more time to materialize. Our new end 2014 forecast is 110.
USD weakness also helps AUD, NZD and CAD
It was a good week for both the Australian dollar and the New Zealand dollar. The Canadian dollar also rallied, but more modestly. An important reason for these rallies has been USD weakness. First because of the fiscal impasse, later because the Fed is now expected to taper later. The AUD has also rallied, because the market has further priced out rate cuts. Some analysts have moved the rate cut into next year. However, we still expect a rate cut this year. This is also reflected in our bearish AUD view for the end of this year. Moreover, we expect the USD to recover strongly as the market has been too aggressive in adjusting downwards its expectations on the US economy and the Fed. Therefore we have left our forecasts for the end of this year in AUD/USD, NZD/USD, USD/CAD at 0.88, 0.78 and 1.06 respectively. For 2014, we have adjusted our USD forecasts to reflect a less strong appreciation path versus the AUD and CAD. We expect NZD/USD to move sideways in 2014 because of the possibility of a RBNZ rate hike.