Asia FX Talking: All aboard the reflation train

Despite indications of being oversold, which usually lead to at least a short-term correction, the USD index remains in a fairly strong downtrend. This is a much bigger story than purely FX markets, and is reflected in prices of currency substitutes, gold, bitcoin, as well as commodities (oil), equities and the Asian FX complex.

At its heart is the continued money printing by central banks, including but not exclusive to the US Federal Reserve. Realization is strengthening that this will continue, and that it will be years before we need to worry about rising Fed funds rates again – supporting risk sentiment.

With the exception of the IDR, and INR, which continue to wrestle with very bad Covid-19 issues, the last month has seen all other Asian currencies perform strongly, with the MYR leading the pack aided by stronger oil prices, supportive fiscal policies and a good pandemic.

With the weak USD looking likely to remain in place, given how unlikely a change in Fed policy is, this should keep Asian fx bid in coming months. But the scope for temporary corrections to this, or disruptions to this story from the pandemic, geo-politics, and even the macro economy remains high. This will be a nervous appreciation.