MYR (4.040) ▲

▪ MYR fluctuated between 4.01-4.06 in January and closed lower against the USD amid absence of buying interest due to the extension of Movement Control Order (MCO) as domestic COVID-19 spread continues unabated.

▪ MYR may attempt to reverse its downtrend and strengthen against the USD in February on the back of positive sentiment surrounding the long-awaited US fiscal stimulus and Malaysia's COVID-19 vaccination program. However, MYR will be under pressure if the domestic COVID-19 cases continue to surge and a further extension of the current MCO restrictions.

IDR (14,030) ▲

▪ IDR closed slightly higher in January after Bank Indonesia (BI) kept policy rates on hold and signalled that it would allow the rupiah to gain further in line with the market mechanism. Earlier, the currency was pressured following BI governor comments that sign of rising inflation is expected in 4Q21.

▪ IDR is expected to strengthen in February, supported by the expectation of further US fiscal stimulus, dovish US Fed, and vaccine rollout progress. Nonetheless, the upside would be capped on rising COVID-19 cases.

THB (29.915) ▲

▪ THB traded slightly higher supported by the announcement of additional fiscal stimulus worth THB210b amidst the surge in daily COVID-19 cases and re-imposement of curbing measures.

▪ THB is expected to remain on a strengthening mode as sentiment would be lifted by the easing of COVID-19 restrictions in several provinces and kick off of the first phase of vaccine rollout on 14th February.

CNY (6.428) ▲

▪ CNY soared to its strongest level since June 2018, underpinned by recovery hopes and a spike in overnight repo rate amid pre-holiday demand. These outweighed the pressure from the US-CN clash over Taiwan, doubts on the US stimulus package and mixed outturn of December’s economic data.

▪ CNY may rise further on favourable yield differential and Fed’s reiteration of its easy policy stance. However, the gain will be capped by stricter lockdown over the Lunar New Year holiday amid new COVID-19 outbreaks and worries over the US-CN relation.

JPY (104.680) ▼

▪ JPY weakened against the greenback towards the end of January, amid weak Japanese economic data and a modestly improving USD. Several areas of Japan were placed under a state of emergency as COVID-19 infections surged, weighing on the Yen.

▪ JPY may continue its downtrend as Japan struggles to contain COVID-19, with a potential extension to the state of emergency, and vaccine rollout not expected until only late February. This downside may be limited should progress on US fiscal stimulus move the USD lower.

Surging COVID-19 cases and curbing measures to undermine road to recovery

▪ COVID-19 pandemic continues to surge around the world with no sign of subsiding. In Asia, China reported more than 2,000 local cases of COVID- 19 in January, mainly in the northern area, forcing the authorities to place over 22.0m people on lockdown with millions of people tested for COVID- 19. As a result, China’s economic recovery continued at a slower pace, as reflected by the latest manufacturing PMI and non-manufacturing PMI, which slipped to 51.3 and 52.4 in January, respectively (Dec: 51.9 and 55.7 respectively).

▪ Other Asian countries are also facing the same trend. Malaysia continues to record four-digit daily cases and hit a new record of 5,728 last Saturday, though the country is under Movement Control Order 2.0 (MCO2.0) since 13 January. Similarly, Indonesia has reimposed large-scale social distancing restriction from 11 January to stem the spread of COVID-19, but positive cases continue to hit a new record, while total cases exceeded 1.0m marks.

▪ The surging COVID-19 cases in Asian countries and globally would undoubtedly impact production and business sentiment in the immediate term, which is expected to weigh on growth recovery and put risk-prone currencies under pressure. Nonetheless, the anticipated resumption of dollar weakness in hopes of further US fiscal stimulus, dovish US Fed and vaccine optimism as more countries are expected to embark on mass vaccination campaign may further support Asian currencies.

Source: Kenanga Research - 2 Feb 2021