EM FX Weekly – EM FX divergence

In this publication: EM FX divergence, with most Asian FX recovering, while currencies of commodity exporters have suffered. The sentiment in offshore Chinese yuan has improved

 

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EM FX divergence…

In the past week, emerging market currencies performance has diverged as investors cherry pick which currencies are likely to benefit given continued weak commodity prices and lower probability that the Fed will tighten monetary policy this year. Asian currencies did relatively well (see below) while currencies of commodity exporting countries suffered. The weakest performing currencies were Mexican peso, Russian ruble and the Chilean peso.

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…with most Asian FX recovering

The IDR has outperformed for five consecutive weeks as the probability of Fed rate hike has diminished. In our view, most of the IDR gains are probably behind us as Bank Indonesia (BI) is likely to replenish its foreign currency reserves. In addition, it will not tolerate too much strengthening of the IDR. Indeed, BI recently stated that USD/IDR is likely to be in a range of 13,300 to 13,700 this year. The Thai baht (THB) was also in favour as a stronger Japanese yen (JPY) would benefit Thai exporters due to export similarities with Japanese exporters. Given the Singapore dollar’s (SGD) high sensitivity to short term yields in the US, lower US Treasury yields have supported the SGD against the USD. We like to highlight that the S$NEER is at stronger levels than when the Monetary Authority of Singapore (MAS) shifted to a slower appreciation pace of S$NEER on 14 October last year. Further gains in the SGD are likely to pose downside risks to Singapore’s economic growth and inflation outlook. On the other hand, the Indian rupee underperformed due to concerns about the sustainability of India’s growth engine and fiscal discipline.

The sentiment in CNH has improved

Sentiment in the offshore Chinese yuan (CNH) also improved in both the spot and forwards market as the prospects of capital outflows are likely to recede if monetary policy in the US remains on hold. The 1 year USD/CNH outright has slumped from above 6.95 in early January to below 6.75, closer to our year-end target of 6.73.

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