Asia FX Talking: Caution ahead of Osaka G20

Conjecture about whether the Chinese president will attend the G20 Osaka meeting, and whether or not he will meet on the sidelines to talk trade with US President Trump has been relentless in recent weeks. Resting on that one decision could be 25% of tariffs on another US$300bn of Chinese goods, and a new gut-wrenching lurch down in the Asian economic cycle and FX markets.

We aren’t expecting any breakthroughs, but neither do we anticipate this being the tipping point from which things suddenly get a whole lot worse. If we’re right, then any “upside” on the most beleaguered currencies in the region – think Korean won and the Taiwanese dollar - is likely to be capped.

The economic backdrop is now quite different from just a month or two ago, with a very good chance that we see Fed rate cuts in the coming months if not weeks. At current and perhaps even lower Treasury yields, the trusted relationship between the USD and incremental increases in tariffs (USD has appreciated until now) may change.

Local monetary responses are also beginning to provide some pushback, and it’s noteworthy that the performance of the “cutters” is often better than those who are holding steady – food for thought for those who haven’t yet cut, but look as if they soon will. Think the central banks of Korea and Indonesia. 

In the backdrop, falling oil prices will support the usual suspects – INR, PHP, but weigh against the MYR – that already looks partly priced in. But the extent and durability of oil’s decline is still unclear. If it falls much further, Asia’s exporters may suffer an additional blow from the reduced purchasing power of the producer nations, as in 2015/16.