US-China: New dynamic of action-reaction escalation bodes ill; Weaker USD heralds extended upturn for selected Asian currencies

What has changed – highlights from recent developments:

• Asian economies need more vigorous policy responses: India’s Reserve Bank has used its annual report to plead for more structural reforms especially in land and labour markets. The RBI injected a sense of urgency into its plea by warning that India’s potential growth could be undermined otherwise. In Indonesia, crucial labour market reforms made further headway in parliament but improvements to the tax regime needed to expand the tax base do not seem feasible. The Philippines is likely to see further monetary easing in October but more fiscal support is also needed for the economy.
• Asian political risks: Despite substantial efforts over 20 years to contain it, terrorism remains a risk in Southeast Asia. Two suicide blasts killed 15 people in the Philippines. In Indonesia, however, timely action by security forces nipped a potentially serious attack in the bud. In the Philippines, there is more speculation about President Duterte’s health.

US-China: A new dynamic of action-reaction escalation bodes ill for regional stability

• In recent weeks, the US and China have engaged in military and political actions which risk triggering an escalation, each reacting against perceived mischief-making by the other.
• Regional countries are responding to China’s increased assertiveness. Alliances are forming against China – the US, Japan and Australia in one clear alliance which India and Taiwan are likely to discreetly support while Vietnam and India appear to be cooperating more closely. Malaysia and the Philippines, which had initially tried to be friendly with China have recalibrated their approaches in different ways to adopt a more robust stance towards China.

A weaker USD heralds an extended upturn for Asian currencies with strong fundamentals

• We maintain our above-consensus view on the CNY and expect recent weakness in the MYR, THB and KRW to be short-lived.
• Sustained US Dollar weakness is unlikely to be a salve for the INR, IDR and the PHP which remain vulnerable due to their less-than-favourable fundamentals.
• The region’s safe haven currencies, the TWD and the SGD, are also poised for further gains.

Forecast table for currencies against the USD

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