EM Asian currencies likely to remain weak against greenback this year, says Scotiabank

EM Asian currencies are expected to 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 President-elect Donald Trump’s economic and fiscal policies.

Trump’s victory will bring “considerable uncertainty” on the economy and monetary policy, according to minutes from the Fed’s 13-14 December policy meeting released Wednesday. Republicans will control both the White House and Congress when Trump takes office on 20 January, Scotiabank reported.

EM Asian currencies are more likely to weaken ahead of major FOMC meetings with press conference and updated "dot plot," particularly if U.S. macro data beat market expectations in the run-up to those meetings. However, the dollar also tends to pare its gains post major FOMC meetings if a rate hike is delivered.

USD/CNY fixing and spot is expected to stay below 7.00 prior to the Chinese New Year after lingering around 6.95 in the second half of December. It seems the PBoC intends to maintain yuan liquidity conditions relatively tight in both onshore and offshore markets to stabilize and defend the yuan, together with its lower-than-expected daily reference rates.

Bloomberg reported yesterday that China is preparing contingency plans for the yuan depreciation and capital outflows, including ordering some SOEs to temporarily convert some FX holdings into the yuan under the current account if necessary. Meanwhile, Indian banks have disbursed about INR 8tn in new currency bills.

"Moreover, we believe it will enhance the BJP-led NDA government’s capability to push forward reforms that is INR-positive if the party can win the Assembly elections that will start in February with results to be announced on 11 March in five states including Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur," the report said.