EM Asia sentiment continues to improve; regional equities were trading very well on a weaker dollar. ASEAN markets do enjoy a capital inflows bump when the US dollar is broadly weaker.
BUT!!!!
China
In addition to the significant headlines risk around the FOMC and trade war, the local discussion will continue centring around Premier Li Keqiang ’s comments on import tax cuts, and that policymakers have no intention to weaponise the Yuan in a trade war.
By cause in effect, his comments appear to have improved investor sentiment, as the Shanghai Composite ended up having its best week since 2016, although market chatter is suggesting Friday afternoon extension was nudged on by intervention to reach that high-water mark and boost investor conviction ahead of the long weekend. Nonetheless, we will leave that discussion for another day on how China market intervention, if right in this instance, does tend to hurt the credibility of their sincere policy intentions.
But let’s not lose sight of the fact that in the absence of a trade deal or a clear signal that one is about to happen post-November G-20, the policy hawks in the Trump administration will be hell-bent on imposing 25 % tariff on $200 billion if not doubling down to $400 billion.
End of November remains the key, and if no resolution by then, the market will yet again price in a meltdown in Chinese equities and a strong probability the PBOC would allow the renminbi to weaken substantially. Knowing this, investors may tap the brakes after last weeks astonishing equity market recovery, and FX traders will continue to position long USD/CNY, knowing full well where the significant tail risk lies.
As for the regional whipping boys IDR and INR, this a very complicated landscape and surging oil prices will continue to be an outsized problem for both currencies, And despite pledges to fix deficits, there has been no proof in that pudding. Instead, BI and RBI are coming up with creative yet very patchy methods of unorthodox interventions like the mandatory conversion for export proceeds in Indonesia, for example, or taking oil demand off the market in India.
Which brings us full circle, to this weeks FOMC where it’s widely expected both BI and RBI will respond by raising interest rates to match next week Fed hike. So, their ongoing currency struggles will continue to make headlines. However, without addressing the real underlying problems around deficits, hiking interest rates to prop up currency is like putting a band-aid on a broken leg as speculators will continue to target deficit currencies at every opportunity.
Friday Rupee sell-off was directly related to the impact of the RBI raising interest rates which have reportedly caused a massive corporate default for a shadow lender in the housing sector and triggered a significant sell-off in local equity markets.
Ultimately the consumer pays the piper in any rate hike scenario.