Ahead Today
G3: US ISM Services Index
Asia: RBI Monetary Policy, Philippines CPI, Thailand CPI, Indonesia GDP, India HSBC PMI
Market Highlights
In what seems like this continuous feature in the US-Iran conflict of escalation and de-escalation, we saw Brent oil prices fall sharply at the time of our writing below US$80/bbl, as hopes grew around a possible deal to reopen the Strait of Hormuz. In particular, US Treasury Secretary Scott Bessent said in an interview with CNBC that there is a chance there could be a deal “by today or tomorrow to open the strait”, and Qatar said a proposed de-escalation resolution was “being circulated between the parties”, although they cautioned that a solid agreement has not been reached yet. Meanwhile, Iran is considering allowing European nations to remove mines from Hormuz, according to diplomats familiar with the matter.
Overall, markets are trying their best to look through any potential re-ignition in the conflict towards the final destination – and perhaps rightly so. Oil prices have thus far been more benign than headline oil supply disruptions suggest, and some of the resilience in the system has been helped by a much sharper than expected drop in oil imports from China. This in turn may partially reflect some drawdown in inventories, but more importantly for the path forward could also be driven by the availability of the coal-to-chemicals process in China coupled with the ability to switch towards electrification rather than just rely on oil. As such the world has been far more resilient than expected thus far, and may continue to be, but over here there are certainly shocks moving forward including a likely “Super El-Nino” event later this year.
The combination of oil, food price and weather related factors are very important for Asia FX and rates of course, and some more so than others including INR, PHP, and to some extent KRW and THB. Assuming oil prices gradually trend lower in our base case, this is a reason to support our modal forecasts for Asia FX to strengthen gradually against the US Dollar, coupled with other drivers such as still robust exports, a Fed which is on hold for now, coupled with perhaps a more stable Japanese Yen with the possible threat of further FX intervention.
On that note, the key macro release in Asia is the RBI monetary policy meeting. We expect RBI to remain on hold and keep its policy stance neutral, while potentially having some hawkish undertones to keep the possibility of a rate hike later this year alive depend on how food prices and the Monsoon pans out. There could be some tweaks lower in RBI’s inflation forecast and a bump up in its growth forecast.
Overall, we also think RBI will likely want to wait for more clarity on the impact of the measures to attract Dollar inflows such as through the FCNR(B) route. The latest numbers so far suggest more than US$40bn on a gross basis, and perhaps around US$30bn once accounting for the maturity of existing NRI deposits.
We continue to forecast RBI hiking rates by 50bps this cycle bringing the repo rate to 5.75% in its terminal rate, but it is a close call on the exact timing this will start. From an FX perspective, we see USD/INR grinding lower to 94.00 over the next few months, and if this is right INR may benefit as a carry-related trade moving forward.