CNY and SGD likely to outperform other regional currencies, says Scotiabank

A growing concern over the European Central Bank’s (ECB) tapering its monetary stimulus is anticipated to weigh on EM Asian currencies, while boosting the EUR given faded political risks in the eurozone.

In the meantime, the CNY and SGD are anticipated to outperform other regional currencies as both are managed against a currency basket in which the EUR accounts for a big proportion, Scotiabank reported.

US consumer prices were unchanged in June from a month earlier. Meanwhile, the rate of inflation over the past 12 months slowed to 1.6 percent from 1.9 percent in May, retreating from a five-year high of 2.7 percent reported in February this year. It pointed to a tame inflation and reduced the odds of a third interest rate increase from the Fed this year.

Last Wednesday, Fed Chair Janet Yellen flagged considerable uncertainty including inflation and possible changes in fiscal policies before the House Financial Services Committee. While Yellen also said “the federal funds rate would not have to rise all that much further to get to a neutral policy stance,” the Fed is expected to stay on track for a gradual policy tightening over the remainder of the year.

The Fed is likely to take a pause in raising rates at September FOMC meeting, while announcing in September a decision to start reducing its USD 4.5tn balance sheet. In the medium-term, US inflation is expected to finally pick up should the Phillips Curve take effect.

While portfolio inflows have returned to some EM Asian markets, hovering concern over the ECB exiting from its monetary stimulus will likely contain the process and even lead to the reversal of capital inflows easily.

Meanwhile, the ECB President Mario Draghi is scheduled to address the Fed’s Jackson Hole Economic Policy Symposium on 24-26 August for the first time in three years. The annual conference will provide Draghi with an opportunity to signal a policy shift.

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