Kenanga Research & Investment

Asia FX Monthly Outlook - Likely to remain volatile amid Fed’s hawkish stance, but risks skewed to the upside

Publish date: Fri, 01 Jul 2022, 10:13 AM

CNY (6.698) ▲

▪ CNY continued to weaken against the USD in June as parts of China returned to lockdown early in the month and some major cities saw mass testing on fears of COVID-19 resurgence. Furthermore, this was likely exacerbated by the widening monetary policy divergence following the Fed’s 75 basis points (bps) rate hike.

▪ The CNY may show signs of recovery in July following significant nationwide relaxation of restrictions as COVID- 19 cases continued to fall throughout June. Nonetheless, another likely 75 bps hike by the Fed may put pressure on the yuan and cap any appreciation.

JPY (136.360) ▼

▪ JPY plunged against the USD in June, reaching its weakest level since 1998. The yen was depressed by the widening policy divergence between the Bank of Japan (BoJ) and the US Fed, with the latter raising rates by 75 bps last month. This was exacerbated by the BoJ’s recent signals that it would maintain its ultra-accommodative policy.

▪ JPY is expected to remain pressured this month as BoJ’s dovish stance will likely keep Japanese government bond yields at near zero levels, sustaining further foreign outflows. Moreover, the BoJ-Fed policy divergence will likely worsen this month as the Fed is likely to continue its aggressive monetary policy tightening.

MYR (4.408) ▲

▪ MYR weakened to its lowest level since March 2017 as the USD index (DXY) spiked to above the 105.0 level amid Fed's aggressive 75 bps hike. The local note was also pressured by the global recession fears.

▪ The ringgit could strengthen marginally against the USD as the DXY is expected trend lower due to the European Central Bank’s potential rate hike. However, MYR’s upside seems limited due to a potential capital outflows in July.

IDR (14,903) ▼

▪ IDR continued its downtrend against the USD in June as the US Fed remained on a hawkish path to combat inflation. The Rupiah was also weighed by global central banks' acceleration of monetary policy tightening. Nevertheless, the downside bias was partially capped by robust external demand amid elevated commodity prices and as Bank Indonesia (BI) signalled readiness to adjust its policy rate if core inflation accelerates.

▪ The Rupiah is expected to be pressured in the near term as the US Fed would likely raise interest rates further in the next FOMC meeting on July 27. Nevertheless, the downside bias could be capped if BI embarks on an earlierthan-expected monetary policy tightening.

THB (35.362) ▼

▪ THB depreciated against a broad appreciation of USD in June following a hawkish US Fed. The decline in the Baht is also associated with risk-off sentiment amid growing fears of a global recession. Nonetheless, the deprecation was capped towards the month-end, supported by the official nationwide removal of COVID-19 restrictions as Thailand stepped into endemic status in July.

▪ We reckon that THB will face sustained pressure in the near term amid US Fed policy tightening. Nevertheless, the depreciation is expected to be limited due to the positive domestic economic outlook and as the Bank of Thailand hinted on a possible rate hike at its upcoming MPC meeting.

Source: Kenanga Research - 1 Jul 2022

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