FX Daily: More defensive in our currency forecasts
To consolidate as monetary policies converge in 2Q.
Group Research - Econs, Philip Wee24 Mar 2023
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Assuming the US/Swiss bank troubles do not lead to another global crisis or recession, we see Developed Market currencies consolidating in 2Q23. Monetary policy divergences will become less influential in driving exchange rates as central banks converge with the Fed in “normalizing” rate increases to 25 bps and eventually joining the Bank of Canada in pausing the hiking cycle. Unlike a year ago, negative real interest rates have narrowed from aggressive hikes, and headline inflation is coming off its peak. However, central banks are not ready to lower rates because of sticky core inflation from labour shortages and wage growth. Due to the failures of some banks, central banks will want to assess the impact on households and businesses from the past year’s hikes. In some countries, politicians have started to view corporate profitability as another culprit hampering inflation’s return to their desired targets.

Before the US/Swiss banks failed, the Fed’s push for “higher for longer” rates and China’s recovery hopes pulled Asian currencies in both directions. China’s balloon incident escalated US-China tensions and tempered earlier optimism over China ending its Covid Zero policy and reopening its economy and borders. Unlike the global financial crisis, China’s priority this year is not to cushion the global economic slowdown with robust stimulus spending and more purchasing power via currency appreciation. Instead, geo-economic fragmentation from deteriorating US-China relations could weigh on world growth. The drag on the global economy from past hikes was also evident in the region’s export weakness. Some countries like Thailand have started to view currency strength as unfavourable for recovery.

After the tightening last October, the SGD NEER drifted from above to below 1% of the band’s mid-point, a sign of inflation fears giving way to growth worries this year. More than 75% of the respondents in a Monetary Authority of Singapore Survey a fortnight ago do not expect the central bank to tweak the SGD NEER policy band this year. Last week, Vietnam surprised with a whopping 100 bps rate cut to support businesses amid global uncertainties. Rating agencies are monitoring contagion risks from property companies in Vietnam. Household debt worries are discernible in South Korea and Thailand. Political uncertainties could rise ahead of the Thai general elections in May and return after the first 100 days of Malaysia’s unity government. 

Quote of the day
“The measures announced at the weekend by the federal government, FINMA and the SNB have put a halt to the crisis.”
     SNB monetary policy assessment press release of 23 Mar 2023

24 March in history
Great Britain imposed direct rule over Northern Ireland in 1972.

Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]

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