Asia FX Talk - Soft US data weighs on the US dollar

The combination of negative US economic surprises has weighed on the US dollar, supporting Asian currencies.

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Ahead Today

G3: US trade balance and initial jobless claims

Asia: Philippines CPI, China Caixin services, Singapore retail sales, Taiwan CPI

Market Highlights

The US ADP employment report showed a gain of 37,000 private-sector jobs in May, missing market expectations of 114,000. The softer-than-expected print followed a downward revision to April’s ADP employment to 60,000, from 62,000 previously.  It could also presage a notable slowdown in Friday’s nonfarm payrolls. This suggests that hiring momentum is easing amid heightened economic policy uncertainty. In response, President Trump is again putting pressure on Fed Chair Powell to lower the policy rate.

Meanwhile, the ISM services PMI fell to 49.9 from 51.6 in April, indicating contraction and missing the 52.0 estimate. The report highlighted weaker new orders (46.4 vs. 52.3 in April), though ISM services employment rose to 50.7 from 49.0 in April. However, the sub-index for services prices paid jumped to 68.7 in May from 65.1 in April, pointing to a potential rise in PCE inflation.

The combination of negative economic surprises has thus weighed on the US dollar, with the broad US dollar index (DXY) falling 0.5% yesterday. US Treasuries have also rallied across the curve, with the 2-year yield falling 9bps and 10-year yield falling by 10bps, as the weak data prints add to rate-cut pressures. Markets are pricing in 56bps of rate cuts in H2 2025, with the first cut fully priced for September.

Regional FX

Asian currencies are expected to continue finding support from a weaker US dollar, which has been impacted by policy risks. In yesterday’s session, CNH, SGD, and THB gained approximately 0.3%-0.4% against the US dollar, while the KRW saw a larger gain of 1%. The KRW's performance is likely buoyed by an improved domestic political outlook and market expectations for increased fiscal stimulus under new President Lee Jae-myung.

In Indonesia, the rupiah has also benefited from a weakening US dollar. The government is set to have its second round of trade talks with the US next week, aiming to accelerate the negotiation process by providing a list of preferential tariffs on some US goods. We remain cautiously optimistic that Indonesia will be able to negotiate better trade terms with the US.

However, a growth slowdown in Indonesia that began in Q1 could limit the potential for rupiah appreciation. April trade data released earlier this week showed the monthly trade surplus shrank to US$158.8mn, providing less support for the current account and the rupiah. Import growth of 21.8%yoy outpaced the 5.8%yoy export growth. The export slowdown reflects the impact of US tariffs, with shipments to the US slowing notably. While capital goods imports were robust, this belies still weak business sentiment. The manufacturing PMI rose to 47.4 in May from 46.7 in April, but it still indicates contraction.

The ringgit is also likely to be supported by a weak US dollar, recent US-China tariff de-escalation, and sustained investment growth. Ringgit bonds remain in high demand, with a strong 3.3x bid/cover ratio for the 20-year government bond auction on 30 May and a modest pick-up in foreign holdings of local government bonds. Foreign currency deposits also hit a record-high of 11.6% of bank deposits in April, adding to ringgit stability.

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