Bangkok--21 Nov--HSBC Thailand
We raised our USD-Asia forecasts, including for USD-CNY, which we now see at 7.20 by year-end 2017 (from 6.90)
Our working assumption is for less supportive external conditions: higher US yields, risks to already subdued trade
We prefer PHP and THB over RMB and MYR; INR and IDR should perform better amongst EM FX high-yielders
We have raised our USD-Asia forecasts. Notably, we now see USD-RMB at 6.90 by end-2016 (from 6.80) and 7.20 by end-2017 (from 6.90). The revised numbers for the region were first published in Currency Outlook: Special Edition, 15 November 2016. We present them again in Table 1, along with our original forecasts (overleaf). We add extra detail for the recent Asian FX forecast changes in this note.
The uncertainty for Asian currencies has risen after the US presidential election. Our working assumption is that the external backdrop has become less supportive. The US Fed could raise rates faster than the market is expecting, if fiscal stimulus is implemented. Meanwhile, the spill-overs from stronger US growth may not be meaningful for Asian exporters, if the president-elect, Donald Trump, takes a more trade protectionist stance.
Our pecking order within Asian currencies thus depends on which type of Donald Trump's policies (fiscal and/or trade) they are more sensitive to and local-specific factors (Table 2, overleaf). We have a longer term preference for currencies supported by domestic growth momentum (INR, IDR and PHP) and a robust FX policy framework (THB). Flexibility with INR and IDR, however, will be needed, given their sensitivity to core bond volatility and the current environment warrants caution. Nonetheless, both should hold up better than most other high-yielding EM FX.
We suggest avoiding those with US trade exposure and those that are susceptible to stronger capital outflow pressures (RMB and MYR). We also expect low-yielding but export-dependent currencies to underperform (KRW, SGD and TWD).
There is considerable uncertainty around Donald Trump's policies and their impact on US growth, inflation and monetary policy, even before we consider the potential global spill-overs. However, even at this early stage, we believe a higher risk premium is needed for Asian currencies.
Finally, we note that against such an unpredictable external backdrop, local politics have the potential to exacerbate FX volatility. Domestic leadership changes could affect Asia's engagement with the new US administration, for example.