Philippine Peso Eyes BSP, Fed Hike. Stocks See US Japan Trade Talks

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ASEAN Weekly Outlook – Philippine Central Bank, Bank of Indonesia, Fed, US Japan Trade Talks

ASEAN FX experienced mixed performance last week amidst broad US Dollar weakness
Philippine Peso and Indonesian Rupiah face local rate hikes as well as one from the Fed
Emerging markets & stocks eye US Japan trade talks, Singapore Dollar looks to CPI data

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Weakness in the US Dollar offered a mixed week for Southeast Asian currencies with the Singapore Dollar seeing the most aggressive gains. USD/SGD fell about 0.73% which was its largest decline in a week since February. The Malaysian Ringgit also managed to clock in about a 0.2% rise against the US Dollar. Meanwhile the Indonesian Rupiah and Philippine Peso fared worse.

USD/IDR and USD/PHP rose at the early stages of last week, responding to increasing hawkish Fed monetary policy expectations. Then towards the end of the week, broad weakness in the British Pound amidst renewed Brexit worries revived the US Dollar. UK Prime Minister Theresa May sent Sterling plummeting as she said that they and the EU are at an impasse on talks.

The week ahead for ASEAN FX is filled with monetary policy event risk. Starting with the domestic ones, the Philippine Peso awaits a central bank interest rate announcement. This follows the Bangko Sentral ng Pilipinas (BSP) reactivating a hedging program last week which was originally created back in the Asia Financial Crisis to help ease the significant depreciation in their currency.

The central bank of the Philippines will likely step up currency boosting measures, the markets are pricing in a 50 basis point hike which would bring the BSP overnight borrowing rate from 4.00% to 4.50%. This would also help fight inflation which is hovering at 6.4% y/y. Typhoon Mangkhut, which comes at an unfortunate time, had recently destroyed countless acres of farming, pressuring rice prices higher.

While the rate hike itself is unlikely to bolster PHP further as the markets have priced this in already, it’s the central bank’s forward guidance that may further lift the Philippine Peso if its sounds hawkish enough. Meanwhile, the Indonesian Rupiah also looks to next week’s central bank rate announcement. The Bank of Indonesia is also expected to raise rates, albeit by just 25 basis points from 5.50% to 5.75%.

There may also be room for IDR strength there on hawkish forward guidance. Last week, Indonesia’s Finance Ministry noted that they see the Rupiah as ‘undervalued’. In the meantime, the central bank continues to intervene in the foreign exchange market to maintain FX stability. The Singapore Dollar looks to August’s CPI report where core prices are expected to rise 2.1% from 1.9%. That may boost SGD too.

Across the Pacific Ocean, we have the widely anticipated Fed monetary policy announcement. There, the Federal Fund Rates is likely to increase by 25 basis points as well to a new range of 2.00 – 2.25 percent. The markets are still not fully pricing in another hike by December and the central bank may set the tone for one next week. This would unwind the dovish Fed hedging seen last week and boost the US Dollar.

As far as risk trends goes, market mood may improve if Japanese-US trade talks end on a positive note. Japan Prime Minister Shinzo Abe and US President Donald Trump will discuss trade on Tuesday. Given the former is a key strategic trading partner for the latter, Japan may escape the worst of any US punishments. This may boost emerging markets, benefiting stocks and weakening the US Dollar via a reduction in haven bids.

Check out the ASEAN Technical Outlook to see where the fundamentals could drive prices for USD/MYR, USD/PHP, USD/IDR and USD/SGD!

Interested in what else is in store for emerging markets and thus risk trends? Check out our primer on currencies such as the Indian Rupee and Argentine Peso.