US Dollar, Singapore Dollar, Indonesian Rupiah, Malaysian Ringgit, Philippine Peso – Talking Points
- Is US Dollar initiating comeback against ASEAN FX?
- Volatility risk may be increasing, capital flows in focus
- External event risk: Powell, Fed speak, US retail sales
- Asia Pacific event risk: China data, Bank of Indonesia
US Dollar ASEAN Weekly Recap
The anti-risk US Dollar managed to recover some lost ground against its ASEAN counterparts this past week. Most gains were seen against the Indonesian Rupiah and Philippine Peso as the Singapore Dollar and Malaysian Ringgit wrapped up little changed. As expected, the fundamental focus for the USD against Southeast Asia currencies remained on overall risk appetite.
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On this front, a sudden surge in volatility towards the end of the week fueled gains in the US Dollar. This followed the Federal Reserve rate decision as Chair Jerome Powell offered some caution about the road ahead for an economic recovery. Meanwhile, local Covid-19 cases crept higher in states like California and Texas after riots and protests erupted after the killing of George Floyd.
The Indonesian Rupiah lost the most ground – see chart below. Indonesia saw a record amount of reported coronavirus cases over a daily period, a worrying sign as the nation looks to begin reopening select businesses like construction and mining. The Philippine Peso also underperformed in the aftermath of local exports unexpectedly shrinking -50.8% y/y in April which was the most since 2009.
Last Week’s US Dollar Performance
ASEAN-Based US Dollar Index averages USD/SGD, USD/IDR, USD/MYR and USD/PHP
External Event Risk – Fed Speak and Jerome Powell, US Retail Sales, Liquidity
With volatility appearing to be on the rise, this could set the US Dollar in a position to benefit in the week ahead. This is as the Fed is noticeably slowing the pace of uptake in its balance sheet, perhaps leaving investors yearning for more liquidity. Less support from the central bank arguably raises the importance of economic developments to continue pushing global equities to new highs.
In this case, Fed Chair Jerome Powell will be presenting the semi-annual monetary policy report before the Senate Banking Committee on Tuesday. Policymakers from other branches will also be speaking. If officials urge caution about the speed of a recovery, then perhaps a further repricing in equities could be due as second-quarter earnings gets going. That may boost the US Dollar, pushing USD/SGD and USD/MYR higher.
Other ASEAN FX like IDR and PHP may also closely watch the trend in emerging market capital flows. A sudden outflow that coincides with market volatility risks reigniting selling pressure in ASEAN currencies. There may be a chance that US retail sales on Tuesday surprises higher. A further improvement in economic conditions from the world’s largest economy could reverberate into global financial markets.
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ASEAN Event Risk – China Industrial Production & Retail Sales, Bank of Indonesia
From the Asia Pacific region, event risk is fairly light. It begins with Chinese industrial production and retail sales. Data out of the world’s second-largest economy has been outperforming relative to economists’ expectations lately. More of the same would continue underscoring China’s coronavirus recovery. With it being a key trading partner of neighboring ASEAN countries, that may continue positively spilling over.
That could cap downside scope for SGD, IDR, PHP and MYR on average. On Thursday, the Bank of Indonesia is expected to cut its benchmark 7-day reverse repo rate to 4.25% from 4.50% prior. However, this may not necessarily bode ill for the Indonesian Rupiah. The central bank has lately been taking efforts to uphold and stabilize its currency. As such, it could intervene if selling pressure accelerates in IDR down the road.
Check out my ASEAN technical forecast for further insight into SGD, IDR, PHP and MYR
At the end of last week, the 20-day rolling correlation coefficient between my ASEAN-based US Dollar index and the MSCI Emerging Markets Index (EEM) stood at -0.96. Values closer to -1 indicate an increasingly inverse relationship, though it is important to recognize that correlation does not imply causation.
ASEAN-Based USD Index Versus MSCI Emerging Markets Index – Daily Chart
— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter