Asia FX Talking: Crest of a wave

The trade war has underpinned many of the gyrations of Asian currencies in recent months, with the ebbs and flow of optimism driven one way and then the other by comments and gestures from the two warring sides. This is especially true now that the CNY has become one of the levers for Chinese policymakers to offset US tariffs.

Where the CNY goes, most Asian currencies follow, at least directionally. While for some currencies, there is also the added complication of the electronics cycle to overlay. This has been a particular headache for the region’s top electronics producers, and thoughts of a recent trough in this sector may be looking somewhat premature following weak exports from Korea and disappointing Singaporean production figures.

There is still a degree of central bank accommodation to factor into our near-term forecasts for some currencies. But the over-riding directional call for most will hinge on further trade war developments. September is regarded by some as a month of relative improvement in trade sentiment, though talks that were scheduled to occur are only now going to happen in October.

We regard the US and China as still far apart from any comprehensive deal. And that should drive regional currency weakness in the near term. Closer to the Presidential election, the chances of a deal and FX recovery are higher. But there is still plenty of downside risk to that view. It is not a high conviction call.