Asia FX Talking: Balance of risks

The outlook for most Asian currencies in the near-term will be mainly determined by global sentiment swings, rather than by domestic developments.

In particular, the surge in new US Covid-19 cases and economic re-closure has the potential to seriously dent market sentiment, but so far, is being held at bay by a combination of better (though of course lagged) economic data, and continued hopes that progress towards a vaccine is being made.

This is a precarious balance, and given the market strength that has dominated the period since March, our view is that the near-term risks are more skewed towards a correction in local currencies to weaker rates, before returning to a stronger footing.

The commodity currencies - the Australian and New Zealand dollars - may be at most risk of such a correction, though joined by the high beta currencies of the Korean won and Indonesian rupiah. Geopolitical noise can provide a further source of volatility for the Chinese yuan, as trade and tech war tensions are ratcheted up further by potential sanctions on Chinese officials over the Hong Kong National Security law.