Week Ahead FX outlook:
Key FX views:
For next week, markets in Asia will focus on the Bank of Japan policy meeting, developments in a possible snap election in Japan, coupled with China’s macro numbers including the 4Q GDP and December data. In addition, central banks across Asia from Bank Indonesia and Bank Negara Malaysia will hold policy meetings. Vietnam’s five-yearly National Party Congress held between 19-23 January next week will also be important to gauge whether structural reform momentum continues.
In particular, latest indications are that Japan’s Prime Minister Takaichi will provide more details on 19 January of her plan to dissolve the House of Representatives for a snap election. Assuming that is the case, and the Lower House is dissolved shortly after the Diet session opens on 23 January, the possible timings for a snap election would involve either official campaigning starting on 27 January and voting on 8 Feb, or campaigning beginning on 3 Feb and voting on 15 Feb. With these broader political developments in context, the Bank of Japan is likely to remain on hold in the near-term for its upcoming policy meeting, but markets will watch closely for any change in tone on future rate hikes, and with that whether a weak Japanese Yen plays a role. From an FX perspective, we will need some clarity from the elections before JPY could change its current trend, but suffice to say JPY is already quite weak and our global team still looks for USD/JPY to head lower over the medium-term.
In sharp contrast, CNY and with that offshore CNH have continued to be very resilient, and both have to some extent moved against the divergent trend across several Asian currency pairs, not least the likes of weakness in JPY, KRW, and also the higher yielders such as INR, IDR and PHP. The macro data out next week could hint at some softness in the macroeconomy in China, but we think the bigger trend for USD/CNY is still for it to move lower towards the 6.90-6.80 handle over time, reflecting still cheap valuations for Chinese assets, coupled with continued FX conversion by exporters. Positive seasonality for Dec/Jan might nonetheless have played some modest role in helping CNY.
We see increasing divergence, with the relationship between CNH and other Asian FX breaking down to some extent
