NJA Asia: More pain ahead

What will be more important for Asian FX is the pace of Fed hikes. Countries with large external borrowings and high levels of foreign ownership will likely suffer most as USD liquidity tightens. In Asia, this implies that Indonesia and Malaysia will be more exposed than other countries, with both IDR and MYR in particular remaining vulnerable to higher US rates. Overall, a stronger USD/Asia FX outlook is expected, with further depreciation in the CNY adding another layer of pressure on Asian currencies, especially those that are most closely linked to China via trade and competitiveness channels, namely the KRW and TWD. Indeed, the recent announcement of the launch of the CFETS CNY index is a clear indication that China will allow USDCNY to move higher in an environment of USD strength, as the Chinese authorities shift their focus towards a basket measure of currencies.

The main highlight of the data calendar in the next couple of weeks is China's NBS December manufacturing PMI (1 January 2016). The PMI is expected to remain flat but still in contraction territory around 49.6, with a temporary stabilisation in industrial production and infrastructure investment likely to provide some support. Hard manufacturing and production data for November in Taiwan (23 December), Singapore (24 December), Thailand (29 December) and Korea (30 December) will also be in focus, with the forecasts of annual changes of -5.4%, 3.3%, -2.2% and +2.8%, respectively. Overall the picture is likely to be one of subdued production for all of them given weak external demand and in Korea's case still elevated inventory levels. Moreover, Korean exports (1 January 2016) are likely to contract again in December, with a 12.5% y/y.

November Inflation releases in Malaysia (21 December), Singapore (23 December) and Korea (31 December) will also garner attention, although the data will alter expectations for the path of monetary policy in the near term given wariness around the pace of Fed rate hikes. Relatively subdued y/y readings of 2.8%, 0.4%, and 1.0%, is expected respectively. 

"We still see scope for easing in Korea and think the BoK will deliver another 25bp rate cut in Q1, ahead of the National Assembly elections in April 2016. We also believe a weak KRW bias will resume, as the government continues to encourage state entities to recycle the current account surplus", says Barclays.