Ahead Today
G3: US PPI, Germany CPI
Asia: India FY2026-27 Budget, Taiwan GDP, Thailand Current Account
Market Highlights
Markets endured a brief but intense bout of risk-off, driven by a combination of worries over a possible strike on Iran by the US, coupled with softer than expected earnings results from Microsoft. A perfect example of this rollercoaster and somewhat bubbly-like nature of markets is certainly gold prices, where we saw the precious metal fall from US$5600 levels to US$5100 within a short span of time, before recovering most of the losses as we speak – of course all these coming after an absolutely phenomenal rise through the start of 2026.
Notwithstanding these risks above, we continue to think that strong risk sentiment can continue through 2026, especially towards assets which are undervalued outside of the US. What gives us some comfort for our region is the fact that industrial metal prices continue to rise, with copper in particular surging by as much as 11% to trade above US$14,500 a ton for the first time ever. Our analysis shows that industrial metals are one of the best leading indicators of Asia’s exports, and the trend thus far suggests that Asia’s exports could if anything accelerate through 1H2026 despite all the global uncertainties. If we combine all these with still steady global economic and inflation surprise indices, coupled with the surge in spot DRAM prices, we think the export outlook and risk sentiment outlook for Asia remains quite bright.
With this in context, we as such continue to like currencies of electronics exporters in Asia such as KRW, TWD, MYR, and we think Asia FX the likes of SGD and CNY can be resilient through 2026. A key underlying assumption is that there should be some recovery in the Japanese Yen through 2026 (which should also help the likes of KRW), and that the recent spike in oil prices should prove temporary given continued global oversupply in oil to the tune of 3-4 million barrels per day as per the IEA’s estimates. On China as well, we think there should be some gradual improvement in the domestic economy, and as such this should also help both the RMB together with China-sensitive currencies in our region. China’s structural challenges in the property market remain deep-seated of course, and while there was news yesterday that China will no longer require real estate developers to file reports on its “three red lines”, the bigger binding constraint is not the submission of these documents but more the supply of credit from banks and overall cautiousness from lenders to China’s property sector – which is likely to remain.
Meanwhile, the Asia high-yielders such as INR, PHP and IDR should continue to underperform for local reasons.
On that front, India’s FY2026/27 Budget to be announced on 1 Feb Sunday will be more important than usual from an INR FX and rates perspective. Markets will watch closely for whether the central government in India commits to a credible fiscal consolidation path, and this is coming in the broader context of rising debt borrowing requirements from state governments with increasing cash transfer programs at the state level. In addition, an environment of weak capital inflows and with that continued RBI FX intervention has resulted in a general rise in interest rate structure, with fiscal concerns also pushing up government bond yields on the longer-end despite RBI rate cuts and also continued INR liquidity injections (see India – Flows before growth – this time is different for INR).
What complicates this FY2026/27 Budget somewhat is that the government is also moving to now target the central government debt to GDP ratio, from the fiscal deficit previously. The expectation for markets is that India will likely target government debt to GDP at around 54-55% for FY2026/27 from 56% of GDP currently, while this would probably imply a central government fiscal deficit anchor of 4.2% of GDP from 4.4% previously. The central government’s gross borrowing need is as such likely to rise to INR16.5 trillion with debt maturities of around INR5.5trillion for FY2026/27, with net borrowing still quite elevated above INR11trillion and state level borrowing remaining high for FY2026/27.
From an FX perspective, we continue to see INR underperforming through 2026, and think buying USD/INR on dips is still a good strategy even as we are neutral at current levels tactically given how much INR has already weakened (see India – Flows before growth – this time is different for INR).
