Asia FX Talking: China Continues To Hold The FX Line

• USD/CNY traded within a tight band over the past month. Volatility was low before depreciation pressure eased toward the end of April. The yuan may have also benefited from capital inflows during a rebound of equities.
• The People's Bank of China's stance on the RMB remains focused on stability, meaning depreciation pressure will be managed.
• Yield spreads will remain the main catalyst for the CNY. A politburo meeting noted that rate cuts were on the table this year, which could worsen the interest rate differential if cuts were made before the Fed makes its move.

• The won hit a year-high of 1,400 in April as rate inaction expectations were extended despite a solid recovery of trade.
• 1Q24 GDP (1.3% QoQ) showed the resilience of the economy, while inflation is expected to remain around the 3% level for a considerable time. The Bank of Korea's first rate cut is unlikely now until 4Q24.
• The end of 2Q24 should show clear signs of KRW appreciation, assuming US data slows down. But rising uncertainty about US politics and government policies will work against the KRW towards the year-end

• USD/INR is trading up around the 83.5 level, which is higher than it has been for most of the period since October last year, but still only a very slight depreciation compared to other Asian FX.
• In the last 12 months, the rupee has been the best performing currency after the Hong Kong dollar, though it has been a bit softer in the last month, lagging the Malaysian ringgit and Chinese yuan.
• Although there appears to be a little more tolerance for volatility than previously, we still don't see the Reserve Bank of India's control on the INR being loosened appreciably this year.

• The Indonesian rupiah gapped higher after the long Eid holidays in April, tracking other Asian currencies weaker. There was some support from more positive trade balance data on 22 April.
• Bank Indonesia surprised markets with a 25bp rate hike on 30 April, taking the BI-rate to 6.25%. IDR weakness was cited as a reason for the decision. At the press conference, Governor Perry Warjiyo took on a noticeably more hawkish tone.
• Indonesia's external balance will remain important for the currency while the rate differential with the US remains tight at just 75bp.

• The Philippine peso weakened sharply in April as foreign investors dumped local shares on concerns about economic growth and on heightened geopolitical tension.
• This was not helped by remarks from Bangko Sentral ng Pilipinas Governor Eli Remolona, who all but ruled out further rate hikes this year.
• The PHP will continue to be pressured as remittance flows slow during the summer season although a slight improvement in the trade deficit could offset some of this weakness.

• A 20.7% YoY decline for March non-oil domestic exports highlights that the Singapore economy continues to struggle to find momentum and is missing out on the regional pick up in semiconductor demand. 1Q24 GDP came in below expectations at 2.7%, though this was a slight improvement from the previous quarter.
• The Monetary Authority of Singapore maintained all policy settings at its April meeting as inflation remained elevated while economic growth remained tepid.
• Persistent inflation means that MAS policy for modest Singapore dollar NEER appreciation is unlikely to be relaxed any time soon.

• The Taiwan dollar underperformed most Asian currencies over the past month, weakening to 32.65 - the weakest level in eight years – before finding some support and recovering to toward 32.4 in early May.
• Capital outflows continued through much of April but recovered in early May and have been one of the factors supporting the TWD. The US-Taiwan interest rate spread narrowed after Taiwan's rate hike, and the equity market saw a small rally.
• Concerns over geopolitical risk may intermittently add to TWD weakness. Though we would expect the TWD to outperform regional currencies in any dollar-weakening window.

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