US Dollar Drops Before China GDP, Singapore Dollar Up. Rupiah Eyes Bank of Indonesia

US Dollar ASEAN Weekly Recap

The US Dollar underperformed against most of its ASEAN counterparts this past week, with the Singapore Dollar, Thai Baht and Indonesian Rupiah aiming higher. While Philippine Peso held its ground, USD/PHP was unable to breach late December peaks. A key driver of US Dollar weakness could be explained by the rosy performance in Emerging Market stock markets – see hourly chart below.

MSCI ASEAN Indices 1-hour Chart

External Event Risk

A key driver of Emerging Market sentiment is US monetary policy expectations, which influence capital flows going into and out of the developing Asia-Pacific region. All eyes this past week were glued to December’s US CPI report, which revealed inflation running at a 40-year high. The data was mostly in-line, perhaps disappointing overly hawkish Fed rate hike bets, weakening the US Dollar as stocks climbed.

With that said, sentiment cautiously soured to wrap up the week and the US Dollar trimmed some of its losses. The situation for 2022 remains that the Fed, and other central banks from the developed world, are increasingly turning off the flow of stimulus and raising borrowing costs. That poses a challenge for Emerging Market assets, leaving USD/SGD, USD/THB, USD/IDR and USD/PHP vulnerable.

The US economic docket for the week ahead is fairly light outside of earnings reports and jobless claims. Netflix will be a key reporter within the FANG group. Traders will be closely tuned in for how these companies could perform where rising interest rates are once again threatening growth stocks. Still, a lack of prominent external economic event risk places the focus for ASEAN currencies on regional data.

ASEAN, South Asia Economic Data – China GDP, Bank of Indonesia

On Monday, China’s economy is expected to grow just 3.3% year-over-year (y/y) in the fourth quarter of 2021, down from 4.9% in the third. This follows a crumbling property market and ongoing government crackdowns on the technology and education sectors. As the country is the world’s second-largest economy, a softer outcome could dent risk appetite. ASEAN countries also have very close trading relationships with China.

USD/IDR will then be eyeing the Bank of Indonesia interest rate decision, where the 7-day reverse repo rate is expected to remain unchanged at 3.5%. The central bank expects to see inflation rise back into its target range this year, perhaps remaining reluctant to raise borrowing costs until then. It remains keen on maintaining currency stability, which may become more challenging amid a stronger US Dollar.

On January 14th, the 20-day rolling correlation coefficient between my ASEAN-based US Dollar index and the MSCI Emerging Markets Index changed to -0.85 from -0.65 one week ago. Values closer to -1 indicate an increasingly inverse relationship, though it is important to recognize that correlation does not imply causation.

ASEAN-based USD Index Versus EEM Invdex - Daily Chart

ASEAN-Based US Dollar Index averages USD/SGD, USD/IDR, USD/THB and USD/PHP