USD/Asia: Regional currencies back under downward pressure - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the foreign exchange market has remained relatively stable during a quiet Asian trading session.

Key Quotes

“The main development overnight has been the Chinese authorities’ decision to set the daily reference rate for USD/CNY at a new cyclical high reaching its highest level since March 2011. In contrast both the onshore and offshore renminbi rates still remain above the lows from earlier this year as they continue to trade more in line with the reference rate.

Renewed broad-based US dollar strength driven in part by increased expectations that the Fed will soon resume gradual rate hikes is helping to lift USD/CNY although upward pressure is less than during the second half of last year as capital outflows from China have slowed. It supports our analysts in Hong Kong’s view that the recent rebound for the renminbi was likely to prove temporary.

Even as the US dollar was weakening broadly earlier this year, the renminbi continued to weaken against a basket of other major trading partners’ currencies. Bloomberg has also run a report overnight stating that China’s economy has settled into sluggish growth in May. The negative developments are likely to keep Asian currencies under downward pressure in the near-term. The Asian dollar index has already fully reversed its gains from earlier this year and may soon retest the cyclical lows recorded in January.”