Ahead Today
G3: US Conference Board Consumer Confidence
Asia: China industrial profits
Market Highlights
The two key themes impacting markets are US tariff policy uncertainty coupled with the risk of coordinated FX intervention by US and Japanese authorities, all of which have resulted in US Dollar weakness, surge in real assets such as gold, with local factors continuing to drive divergence across Asian currencies.
On tariff uncertainty, President Trump threatened to hike tariffs on goods from South Korea to 25% from 15%, applying to autos, lumber, pharmaceuticals and other reciprocal tariffs. According to Trump, this was due to the South Korea’s legislature’s failure to codify the trade deal. Post the announcement, South Korean authorities said they will host a cabinet meeting on Tuesday to discuss the next steps, even as they were seeking additional details on the tariffs.
From a market perspective, the increasing tariff uncertainty not just on South Korea but also other countries such as Canada and the EU is leading to some Dollar selling through January. Whether this is eventually another TACO episode is unclear, but on our end, we still think that the fundamentals suggest actual tariff increases will be slower to come this year, both because the US mid-terms are coming and also because in actual policy changes Trump has been if anything increasing exemptions for things such as agriculture to reduce the negative impact of tariffs on consumers. As such, we think Asia’s exports, global growth and by extension risk assets can still do quite well through this year, but we are more negative on global bond duration given rising fiscal spending across developed markets.
The other key theme driving markets has certainly been the threat of coordinated FX intervention by Japanese and US authorities. On that front, latest data from Bank of Japan did not show a clear indication of actual FX intervention by MOF at least on Friday, with BOJ’s current account falling by JPY630bn, which is within the range of error bands historically relative to estimates after accounting for fiscal factors.
Nonetheless, sometimes the threat is just as important as the action, and a line in the sand has perhaps been drawn around the 160 levels. Our base case does not build in coordinated intervention, but looking across history, the most effective FX intervention episodes by Japanese authorities have either come when the fundamentals shift (for instance in October 2022 when US CPI came in much lower than expected), or when there has been coordinated FX intervention with other authorities (for eg. in 2011 after the Japan earthquake and certainly during the Plaza and Lourve Accords back in the 1980s).
Apart from the global drivers, we still see Asian high yielding currencies such as IDR and INR underperforming moving forward with their central banks remaining dovish and capital inflows still hard to come by. For IDR, increasing concerns around central bank policy independence with the appointment of Thomas Djiwandono – nephew of President Prabowo – likely to weigh on FX moving forward (see Indonesia - Rupiah stability takes priority but easing bias still intact). Meanwhile, INR money market rates have if anything risen despite RBI’s announcement to inject liquidity worth more than US$23bn on Friday, and more than US$40bn since December last year. The key constraint for INR FX and rates markets is that capital inflows remain scarce (see India – Flows before growth – this time is different for INR)
