Ahead Today
G3: Germany CPI
Asia: India CPI
Market Highlights
Markets took on a more mixed tone overnight, with divergence across Asian currency pairs. The Malaysian ringgit and to a smaller extent the Indian Rupee were the key outperformers in Asia, with the former helped by recent conclusion of a trade deal with the US and implementation of structural and fiscal reforms, while for India the key was the potential for the conclusion of a trade deal with the US, with President Trump saying both the US and India are quite close to coming to a deal. Underperformers in Asia include the South Korean won, which has been weak despite the rebound in risk sentiment in the local KOSPI equity market post news that South Korea’s finance ministry could lower the top taxation rate on dividend to 25% from 35%, with also news that the NPS could increase the domestic allocation to stocks. Part of the FX underperformance could reflect the spillovers from the weakness in the Japanese Yen to KRW, but to some extent the return of carry trades against low Asian yielding funding currencies including the likes of KRW and TWD in our region may be part of the story here as well, including through the transmission mechanism of domestic resident outflows, and despite the recent conclusion of trade deals.
There are certainly also important risks to watch out for moving forward. For India, the recent deadly explosions that we saw in India’s Red Fort in Delhi raises some potential risks of geopolitical tensions flaring up once again, with Pakistan also seeing deadly explosions the same week in Islamabad. Depending on the conclusion of the investigations, this raises some risks of a conflict between India and Pakistan once again, although for now the current information we have is too limited to make a reasonable judgement on this front (see India and Pakistan conflict – Is this time different, Chart 11 for a history). To some extent, the questions around a possible conclusion of a trade deal between India and the US, and the important political constraints from India’s perspective around President Trump’s constant proclivity to claim credit on mediation between India and Pakistan could also be key moving forward. Overall, we still think that dips on USD/INR will be shallow, given our view that India’s tariffs are likely to remain higher than its export competitors, even as RBI caps the topside firmly for now at the 88.80 levels.
The other key risk to watch for moving forward is on the implementation of China’s export controls on rare earths and critical minerals, and how this will be perceived on both sides in terms of the US-China trade truce. The Wall Street Journal reported yesterday that China plans to ease the flow of rare earths and other critical minerals to the US by designing a system that will exclude companies with ties to the US military, while fast-tracking export approvals for other firms, under a “validated end-user” system. For context, there remains important differences in the US and Chinese readout of easing of China’s export controls. On the Chinese side, the rules have so far stated the suspension of implementation of controls announced on 9 October, coupled with suspension of ban on exports to the US of dual-use items related to gallium, germanium, antimony and superhard materials. In short, there are still licenses certainly and restrictions, and we have moved away from a outright ban in certain specific areas but military use remains restricted. From the US side, the readout seems somewhat different, highlighting that the suspension of controls coupled with the issuance of “general licenses” would imply the de facto removal of restrictions more broadly (see link).
To our minds, the licensing regime by China itself is not up for negotiation, while “general licenses” as defined by the US would seem quite different from the reality of what China may ultimately implement including on restrictions on military use. For now, the good news is that both sides continue to push through good faith implementation of the various aspects of the trade truce including on port fees, suspension of the BIS 50% affiliate rule, among others, and we still view the developments so far positively