Standard Chartered Bank Singapore has recently released a report that states that the ASEAN FX (foreign exchange) is likely to recover against the USD in 2024. However, the road to recovery will very much be a rocky one.
The report, which was put together by Standard Chartered ASEAN and South Asia chief economist Edward Lee and Economist Asia, Jonathan Koh, has identified five major pivot points largely in favour of ASEAN FX even as the theme of still-high US rates remains. A key factor is that US rates are likely to stay meaningfully higher than regional rates versus historical trends.
Pivot 1: Monetary policy divergence
The Fed has hiked by an unprecedented pace of 525bps in this hiking cycle. ASEAN central banks have lagged this pace. Using domestic minus US policy rate differentials as a guide, all ASEAN economies now have lower differentials against historical averages. However, the report states that this fall in differentials has likely bottomed out and should help return flows in favour of regional ASEAN currencies.
Pivot 2: Positioning
ASEAN is seeing lower interest rates than the US and other regions. As such, the region has seen an increase in USD deposits and a fall in foreign investor bond holdings in 2022-23. In general, the report leads the experts to believe that foreign positioning in local assets is low, which provides a favourable base in 2024 but could also be a laborious pivot as US interest rates are likely to stay relatively.
Pivot 3: China
The recent negative narrative surrounding China has certainly been reflected in the ASEAN FX due to the region’s significant economic reliance on China. In 10M-2023, the CNY lost c.5.5% against the USD, among the top underperformers in the Asia FX complex. However, the report states that we can expect to see supportive policy measures to help stabilise growth in 2024. We can also expect USD-CNY to ease to 7.0 by end-2024 as the China economy bottoms out.
Pivot 4: Electronics
The downturn in the global electronics sector has not been helpful for Asia’s manufacturing. According to the report however, the global electronics sector has now bottomed out, with electronics exports picking up in Q4. While the MYR and SGD are likely to benefit, there is still some cautious optimism surrounding electronics as the issue of high inventory levels and lacklustre global outlook remains.
Pivot 5: Commodities
In 2023, commodity prices corrected lower from the highs of 2022. This has led to regional commodity exporters such as ID and MY seeing their commodity trade surpluses shrink. On the bright side, regional commodity importers benefited. The 2023 correction in commodity prices also appears to be bottoming out. In the event commodity prices rise in 2024 – especially if global growth sentiment improves in H2 amid monetary policy easing – IDR and MYR should benefit against PHP and THB.
The report also forecasts a strengthening ringgit versus the dollar. Standard Chartered’s report expects the exchange rate to drop to RM4.45 to the dollar by Q1 2025; which indicates that while things will improve, the road to recovery is long.
