Asia FX Weekly - Focus on Bank Indonesia’s policy and South Korea’s GDP

Week Ahead FX outlook:

Key FX views:

Asia’s calendar is led by Bank Indonesia’s policy decision, where we expect a 25bp hike to 6.00% as the central bank continues to provide some support for the Indonesian rupiah. Although inflation remains within BI’s target, domestic policy uncertainty including on fiscal policy in Indonesia are key headwinds for IDR. We continue to expect BI to support the currency through measures such as providing attractive SRBI yields, while we see BI bringing rates up to 6.25% by the end of 2026. Elsewhere China’s one- and five-year loan prime rates are expected to remain unchanged, consistent with the PBoC’s steady rate so far, although weak credit growth and subdued domestic demand activity may tilt the bias towards some policy easing later in the year.

We will also get economic indicators including GDP, inflation and PMIs across Asia. South Korea’s real GDP growth could slow from 3.8%yoy to 3.4%yoy, but what’s just as important for markets and the Bank of Korea is also nominal and disposable income growth, both of which could remain strong given what we have seen from export prices. Meanwhile Singapore’s inflation is expected to rise as fuel and imported-cost pressures begin to filter through the economy including through a sharp increase in electricity tariffs, but we think that the overall inflation picture should keep MAS on hold for now in its exchange rate policy. In Japan, trade figures will precede Friday’s CPI report, with core inflation likely to accelerate modestly as higher energy costs and yen-related import pressures offset softer food inflation. Firm services prices and wage-driven inflation would keep the Bank of Japan on a gradual path towards further policy normalisation. India, Japan and several other major economies will also publish preliminary July PMIs, providing an early indication of whether the energy shock and softer global demand are weighing more visibly on Asian manufacturing.

Globally, the key event will be ECB’s monetary policy meeting. Our global team expects the ECB to keep rates on hold at 2.25%, and as a base case for ECB to hike by 25bps in September. Markets are therefore likely to focus on President Lagarde’s assessment of energy-driven inflation, wage pressures and the growth outlook, as well as any guidance on the timing and direction of the next move.