Ahead Today
G3: Eurozone Services PMI, US S&P Services PMI, Germany CPI
Asia: Philippines CPI, India Services PMI
Market Highlights
Markets started to settle down post the geopolitical developments at the start of 2026 with the US attack on Venezuela and subsequent removal of Nicolas Maduro. Understandably gold prices received a strong bid, while interestingly the Dollar strengthened while Asian FX generally weakened despite an improvement in equity risk sentiment especially outside of the US, although some of these moves reversed partially as we headed through the trading session.
We think that the Dollar strength seen in the early days of 2026 will unlikely continue, and with that we think that Asian FX can do better moving forward, even as there will be increasing dispersion across currencies and rates markets driven by local factors. Part of this forecast reflects our view that the US labour market will remain soft, and with that the Fed will likely cut more than what markets are pricing in through 2026. The data out yesterday is emblematic of this expectation, with US ISM Manufacturing coming in weaker than expected at 47.9 for December from 48.2 previously, with the employment component remaining soft at 44.9. This week’s non-farm payrolls numbers will be important in this regard, with a softer than expected print likely to trigger earlier and perhaps faster pricing for Fed rate cuts.
Our view for Asia FX to generally strengthen against the Dollar are not just driven by the US of course, and the Asia exports and growth story is just as important, as are changes in financial and capital flows including into the likes of China.
The macro datapoints out so far is indicative of better export momentum in December, with Vietnam’s exports surging 24%yoy led by continued strong performance in electronics and machinery. Meanwhile, South Korea’s exports rose by 13%yoy in December, led by a more than 40%yoy surge in chip exports. While we will get more details certainly from the early export reporters such as Taiwan and China in the days ahead, the overall picture emerging we think is still supportive of Asia’s exports doing quite well, given the pickup in lead indicators we track such as industrial metal prices and to a smaller extent the PMIs. There are risks of course including on how tariffs may play out but we think that the chance of tariffs rising sharply from here is lower now given the current détente between US and China coupled with some signs that Trump is at the margin reducing or at the very least delaying some tariffs in the likes of the furniture and agriculture sector perhaps due to pressure on lower income consumers in the US.
Dispersion driven by local factors will become more important for Asia FX and rates markets in 2026. For instance, with capital flows remaining soft into India given still high relative valuations in equity markets coupled with a strong IPO exit pipeline, we think that INR can continue to underperform moving forward (see INR Balance of payments remains unbalanced). For the likes of Vietnam, while exports are strong, the more important story is a possible overheating of the economy with the strong 8%yoy 4Q2025 GDP growth indicative of that possibility. While we remain positive on Vietnam’s macro outlook given the structural reform momentum, from a FX perspective we remain biased to see USD/VND rise over time to 26,800 through 2026 and for the SBV to hike rates later this year – the only Asian central bank to do so (see Vietnam – Modest risk of overheating amidst very positive structural reforms). Meanwhile, domestic policy uncertainty in Indonesia should imply IDR remains on the backfoot through 2026, with the soft import data out indicative of a still weak outlook for domestic demand (Indonesia – BI finds itself in a delicate balancing act).
Overalll, we continue to remain positive on the likes of KRW, MYR, TWD and CNY, and we see USD/CNY moving below 7 handle over time. We as such also see INR, VND and IDR underperforming through 2026 (see Asia FX Outlook 2026: Returning to divergent fundamentals).
