Asian currencies likely to decline ahead of U.S. Inauguration Day, says Scotiabank

Emerging market Asian currencies will continue to be primarily driven by the odds of Fed rate hikes that could change in response to U.S. macro data, Fed comments/minutes and Donald Trump’s economic and fiscal policies. DXY Index surged overnight on a stronger-than-expected ISM Manufacturing Index.

The United States is scheduled to release the Federal Open Market Committee (FOMC) meeting minutes, ADP employment report, ISM non-manufacturing and NFP data in the coming sessions.

The dollar is expected to remain supported and advance versus EM Asian currencies till 2017 U.S. Presidential Inauguration set for 20 January. U.S. President-elect Donald Trump’s reflationary policies, protectionist views and tax repatriation plan would spur demand for the USD and undermine EM Asian currencies, Scotiabank reported.

A combination of looser fiscal policy and tighter monetary policy under the new Trump administration will likely boost the dollar strength against EM Asian currencies further. Donald Trump on Tuesday picked up Robert Lighthizer who is a longstanding protectionist to head the U.S. Trade Representative office. It suggests the Trump administration will take a tougher stance on China.

The Fed’s so-called "dot-plot" showed 6 of 17 officials expected to deliver three rate hikes in 2017, up from their September forecast of two increases. However, Fed Funds Futures contracts haven't fully priced in three rate hikes in 2017. In addition, while base effects could see U.S. inflation edging up in Q1 this year, the prospect of ECB QE tapering talks may undermine DXY Index in late Q3 or early Q4 2017.

"In the weeks ahead, we stay with our long USD against a basket of KRW, MYR and SGD position and 2017 Asian FX trade ideas," Scotiabank commented in its latest research report.