Ahead Today
G3: US ADP employment, ISM services index; eurozone PMI, CPI, and PPI
Asia: China RatingDog services PMI, India service PMI
Market Highlights
The US dollar index (DXY) has lost some momentum after its recent rebound. Nonetheless, the DXY has regained several key technical support levels. Stronger than expected US ISM manufacturing data has also helped temper expectations for deeper rate cuts this year, even as Fed official Miran calls for aggressive easing. Markets continue to price roughly 48bps of Fed rate cuts, and upcoming macro data releases, namely the ADP employment and ISM services reports, will be in focus. The ADP report may show a low-hiring labour market environment, while services activity is likely to stay in expansion, reinforcing the recent manufacturing upturn. A partial US government shutdown has also ended after President Trump reached a funding deal with Senate Democrats, though the January nonfarm payrolls report may still be delayed.
At the same time, geopolitical tensions in the Middle East remain elevated, particularly after the US military shot down an Iranian drone near its aircraft carrier, leading to a pickup in oil prices. Although Iran has signalled to negotiate to de-escalate tensions, the risk of miscalculation by both sides remains. Higher oil prices tend to pose a drag on most Asian FX given the region’s energy import reliance. In particular, the Indian rupee is among the most vulnerable to an oil price shock, though the recent easing in US-India trade frictions could help cushion depreciation pressure.
Regional FX
Asian currencies broadly strengthened against the USD in yesterday’s session, led by the INR (+1.4%) following the US decision to cut tariffs on India to 18% from previously elevated levels of up to 50%. We expect the CNY to remain a stabilizing anchor for most regional FX, supported by the PBOC continuing to set the daily USDCNY fixing rate below the 7.0000 level. Against this backdrop, we retain a constructive outlook on the SGD and MYR, which should continue to benefit from firmer CNY sentiment and overall stable domestic macro fundamentals.
In Indonesia, Finance Minister Purbaya reiterated the government’s intention to keep the fiscal deficit within the 3% of GDP limit, while acknowledging that a USDIDR move toward 17,000 could weigh on social sentiment. He remains upbeat on the growth outlook for this year. But with likely limited fiscal and monetary impulse - assuming the 3% deficit cap is maintained and the scope for further rate cuts is narrow - we think economic growth could hold around 5% with some upside risks, rather than accelerate sharply. In the near term, we expect the rupiah to trade within a 16,700–17,000 range, with sentiment guided by external risk appetite and the strength of USD dynamics.
