Ahead Today
G3: US initial jobless claims
Asia: India BOP
Market Highlights
Brent crude prices have edged modestly higher, remaining elevated amid continued US–Iran hostilities, with progress towards a peace agreement still stalled. Against this backdrop, the US dollar (DXY) has strengthened modestly, supported by a renewed rise in front-end yields. The US 2-year Treasury yield remains above 4%, reinforcing a carry-driven bid for the dollar.
On the US macro front, economic momentum remains resilient. ADP employment increased by 122k in May, up from 105k in April and slightly above consensus expectations of 120k. Meanwhile, ISM services rose to 54.5 from 53.6, also beating consensus of 53.8. Within the details, new orders accelerated sharply to 57.3 from 53.5, highlighting sustained demand. However, the services employment component edged lower to 47.9 from 48.0, missing expectations of 48.8 and remaining in contractionary territory. The prices paid index rose to 71.3 from 70.7, though this was slightly below the 72.3 consensus. Initial jobless claims due later today could provide incremental guidance for Friday’s nonfarm payrolls release.
The macro backdrop continues to anchor market expectations for “higher for longer” fed funds rate, with implications across Asia FX. JPY, KRW, and SGD tend to be quite sensitive to shifts in US rate expectations. Currencies such as IDR, PHP and INR have also come under pressure from rising US rate expectations.
For IDR in particular, vulnerabilities are compounded by domestic policy uncertainty and higher energy prices (see Indonesia: State-led commodity reform a high-stakes shift for the rupiah). The rupiah has continued to weaken, making fresh lows against the US dollar. This is already weighing on investor sentiment. Net foreign equity outflows persist, with the Jakarta Composite Index down more than 30% year-to-date.
Notably, liquidity conditions in USDIDR remain extremely tight, akin to the stress seen during the March 2020 COVID shock. This points to continued upside risks for USDIDR. However, positioning appears increasingly crowded, leaving scope for a sharp reversal should geopolitical risks ease, particularly if there is any de-escalation in US–Iran tensions, alongside greater clarity on domestic policy direction.
In Vietnam, inflation edged higher to 5.6%yoy in May from 5.5% in April, and monthly trade deficit widened to USD 5.2bn from USD 3.3bn previously, amid higher energy prices.