Asian FX Talking: Asian exceptions to the rule

With our FX colleagues extending their expectation for EUR gains against the USD, there is some pressure for us to follow suit in Asia Pacific. But while the general trend may hold for some, there is a growing list of currencies for which we feel that appreciation is no longer a given, and indeed some depreciation is possible in the coming quarter.

At the top of that list is the INR, which with its terrible GDP for 2Q20, awful Covid-19 backdrop, challenged fiscal and monetary options and perennial external balancing issues, is a good contender for at least some periodic weakness. Then too there is the IDR, which is gaining support from a central bank unwilling to undermine it further with rate cuts but only after it undermined it initially with direct financing of the government’s deficit. Thailand is seeing its external surplus shrink, the KRW has had a recent wobble over Covid-19 restrictions (which could happen to any country if it can happen in Korea). There are also some terms of trade tensions in AUD and NZD that might deliver at least a short-term correction, even if not a reversal in recent trends.

So, yes, the USD looks undermined by the Fed, but there are relatively few other currencies out there that look immediately attractive, so the next leg of this journey may be a much bumpier one.