Week Ahead FX outlook:
Key FX views:
Volatility in markets picked up this week, and was characterised by several key themes. These threads include the continued questions and tensions around the sustainability and valuations of AI tech companies, and coming despite the better-than-expected results from Nvidia this week. In addition, uncertainty around whether the Fed will cut in December, coupled with the mixed signals from the non-farm payrolls report and various Fed speakers are leading markets to reassess the path of US rates with some near-term support to the Dollar.
The big FX mover in our region with spillover to Asia FX has been the weakness in the Japanese Yen, with USD/JPY rising to the 157 levels. JPY-sensitive pairs such as KRW and TWD underperformed, also weighed down by weakness from the tech sell-off. Questions around the pace of fiscal spending in Japan and lack of clarity around BOJ rate hikes are contributing to JPY weakness. In addition, the China-Japan tensions and potential negative economic impact through slower tourism and seafood import curbs is also a factor. Looking at past episodes of tensions including from the likes of South Korea during the 2017 THAAD missile deployment conflict, tourism arrivals from Mainland China may fall anywhere between 20% to 50% over a period of 6 months, before some modest improvement thereafter. As a second order impact, Asian markets viewed as alternative tourist destinations to Japan for Mainland Chinese tourists such as South Korea and to a smaller extent Thailand could see some positive spillovers on tourism, although other factors are dominating Asia FX for now.
Looking ahead, markets will focus on the Bank of Korea monetary policy meeting, China’s industrial profits data, coupled with India’s GDP estimates.
Past episodes in history of either tensions or domestic political issues suggest Mainland Chinese tourists could decline between 20% to 50% over a period of 6 months
