US Dollar, Singapore Dollar, Thai Baht, Indonesian Rupiah, Indian Rupee, ASEAN, Fundamental Analysis – Talking Points
- USD mostly steady, ASEAN FX held ground despite market volatility
- What are the fundamental forces stabilizing the Greenback as of late?
- APAC, ASEAN data: BoT, RBI and Indonesian fourth quarter GDP
Despite broad-based market volatility, the haven-linked US Dollar has been struggling to find much room to appreciate. This applied to its ASEAN peers despite a 3.62% weekly decline in the MSCI Emerging Markets Index (EEM) as capital flows reversed course – see below. Currencies like the Singapore Dollar, Philippine Peso and Indonesian Rupiah were flat. The Thai Baht rose, gaining 0.17% against the USD.
Having said that, there has been a notable shift in the Greenback’s pace. The dominant downtrend since late March 2020 has slowed and stabilized, even despite episodes of strength in the S&P 500 in early January. I have been arguing that this is in part due to elevated longer-dated Treasury yields in the US, expressing more confidence in the broader outlook for the economy down the road.
Within the ASEAN-5 region, there are signs of improving economic conditions. Last week, the latest figures from Singapore showed industrial production and unemployment improving. Thailand’s trade surplus widened further in December, opening the door to better-than-expected GDP data despite recent surging coronavirus cases. Philippine fourth-quarter growth slightly disappointed however, but USD/PHP brushed it off.
US Dollar, Emerging Markets Index – Last Week’s Performance
*ASEAN-Based US Dollar Index averages USD/SGD, USD/IDR, USD/THB and USD/PHP
External Event Risk – Market Volatility, US Fiscal Stimulus, NFPs
Rising long bets from retail investors in heavily-shorted stocks seemed to contribute to last week’s market volatility. But, at the onset of this week, plunging short interest in GME shares may be a sign that traders are covering. The VIX ‘fear gauge’ eased on Monday as equities recovered. Still, recent price action has raised concerns about frothy equity valuations that could be vulnerable to sudden changes in sentiment.
As such, that still leaves the Greenback in a position to hold its ground as it is influenced by the tides of risk trends and returns on government debt. The Federal Reserve certainly signaled last week that while it may hold policy loose at current paces, some investors seemed to have been disappointed by a lack of urgency to do more. As such, this is placing greater emphasis on the direction of fiscal policy.
US President Joe Biden may not have room to fulfill his US$1.9 trillion pledge for Covid relief without Republican support. A lack of a 60-vote majority from Democrats in the upper chamber of Congress means that a smaller-than-expected package may be the ultimate outcome. As such, these may have been some of the reasons why ASEAN and Emerging Market currencies have been struggling to accelerate gains as of late.
Fourth-quarter earnings continue this week. All eyes are on tech giants Google (Alphabet) and Amazon. A rather rosy season thus far may have been keeping markets from selling off further. Towards the end of the week, the US will release its latest non-farm payrolls report. December’s report was fairly disappointing and another similarly sour one could easily amplify market volatility in the near term.
ASEAN, South Asia Event Risk – Bank of Thailand, Reserve Bank of India, Indonesian GDP
Taking a look at the ASEAN economic docket, USD/THB is eyeing the Bank of Thailand monetary policy announcement on Wednesday. The BoT is expected to leave benchmark lending rates unchanged at 0.50%. The central bank recently warned that it may revise its 2021 growth outlook lower. What will be more interesting to watch for is commentary on the Baht’s level. Its strength has been a concern for policymakers.
Then on Friday, USD/IDR will be awaiting Indonesian fourth-quarter GDP figures. Output is expected to shrink 2.3% q/q versus -3.49% in Q3. This is perhaps partly why the nation announced that the finance ministry, central bank and financial services authority will issue a “joint policy package” in order to deal with the recession. The Rupiah remains an interest for the Bank of Indonesia, which is trying to stabilize its value.
Meanwhile on the same day in India, the RBI will hold its monetary policy announcement. Over the past 24 hours, the Nifty 50 received a boost as the nation revealed a US$480 billion budget to support the Pandemic-inflicted economy. A handful of economists envision a 25-basis point cut to 3.75% given recent declines in headline inflation. But, the broader consensus seems to be for a hold. The former may send USD/INR higher.
On February 1st, the 20-day rolling correlation coefficient between my ASEAN-based US Dollar index and the MSCI Emerging Markets Index fell to 0.19 from 0.40 one week ago. Values closer to +1 indicate an increasingly positive relationship, though it is important to recognize that correlation does not imply causation.
ASEAN-Based USD Index Versus MSCI Emerging Markets Index – Daily Chart