Most Asian currencies should strengthen against the USD – HSBC

Asian currencies dropped after the June FOMC meeting. Yet, economists at HSBC believe the smaller and more open ASEAN currencies should regain some lost ground later this year. For the RMB, domestic factors should be more dominant than the broad USD trend.

Main drivers for the RMB should be domestic factors

“We believe the smaller and more open ASEAN currencies, such as the SGD and MYR, should be able to regain some lost ground as markets re-focus on their vaccination progress and re-opening timelines.” 

“The higher-yielding currencies, such as the INR, may remain relatively more subdued because of the Federal Reserve’s (Fed) impending tapering, but we think weak domestic demand in these economies should restrain their current account deficits and put a lid on inflationary pressures, thereby making them less vulnerable this time around compared to the 2013 ‘taper tantrum’ episode. That said, we are cognizant of the risks to our view, if the broad USD trend changes.”

“For the RMB, domestic factors should be more dominant than the broad USD trend, in our view. In China, economic activity data for May was generally below consensus expectations. The RMB’s cyclical advantage has indeed narrowed. This will be reflected in rate differentials, current account dynamics (narrowing surplus), and capital flows (less inflows from foreigners, more outflows from locals).”