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US Dollar Vulnerable as SGD, INR Gain with Emerging Markets. What are Risks?

US Dollar Vulnerable as SGD, INR Gain with Emerging Markets. What are Risks?

Daniel Dubrovsky, Strategist

US Dollar, Singapore Dollar, Indonesian Rupiah, Malaysian Ringgit, Philippine Peso – Talking Points

  • US Dollar losing streak vs ASEAN extends as emerging market stocks rise
  • External risks: US lockdowns, fiscal aid & omnibus bill, Brexit, EU budget
  • APAC, ASEAN data: China & Philippine trade, India industrial production
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US Dollar ASEAN Weekly Recap

The haven-linked US Dollar extended losses against most ASEAN currencies this past week such as the Singapore Dollar, Philippine Peso and Malaysian Ringgit. Global market sentiment continued improving, with equities on Wall Street gaining. Looking at developing economies, the MSCI Emerging Markets Index (EEM) closed at its highest since January 2018 as capital continued to pour in from yield-seeking investors.

An exception was the Indonesian Rupiah, which slightly weakened against the US Dollar. On Friday, foreign investors sold (US$)277.7 in Indonesian stocks (week-to-date), the most since the middle of September. Meanwhile, USD/INR was mostly flat following the Reserve Bank of India rate decision as policymakers left benchmark lending rates unchanged with inflation running above the upper end of the central bank’s target.

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Last Week’s US Dollar Performance

US Dollar Vulnerable as SGD, INR Gain with Emerging Markets. What are Risks?

*ASEAN-Based US Dollar Index averages USD/SGD, USD/IDR, USD/MYR and USD/PHP

External Event Risk – First Covid Doses, US Stimulus and Sentiment, Brexit Talks, EU Budget

The focus for ASEAN currencies will likely remain on risk trends as the world prepares for the first dose of a coronavirus vaccine. In the US, the FDA could authorize the Pfizer/BioNTech vaccine towards the end of the week, opening the door to distribution within 24 hours. This is as the UK is anticipated to start immunizing citizens on Tuesday.

Markets have been focusing on Covid vaccine hopes, shrugging off rising cases in places like the US. Parts of the latter are expected to tighten lockdowns, such as in the San Francisco Bay Area. That may derail economic recovery expectations, especially in the wake of November’s soft non-farm payrolls report. The nation added 245k jobs, much less than the 469k forecast as a decline in labor force participation likely dragged unemployment lower.

Policymakers from both sides of the aisle in Washington seem to be inching towards Covid relief measures. These include a combo of $908 billion in aid in addition to an omnibus bill to avoid a government shutdown. In Europe, a $2.2 trillion budget and recovery package risks being vetoed by Hungary and Poland if a deal is not reached by December 7th. This is as Brexit talks seem to be heading into the final stage.

On Friday, University of Michigan sentiment will cross the wires. A decline to 76.0 from 76.9 is expected for December. But, given the tendency for local data to undershoot estimates as of late, it won’t be too surprising to see a miss. With stocks hitting record highs, there could be a chance of profit-taking unfolding into year-end, opening the door to interim pullbacks. That would be an upside factor for the US Dollar.

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ASEAN, South Asia Event Risk – China, Philippine Trade. Indian Industrial Production

The ASEAN economic docket is rather light in the week ahead. Investors will be eying items like Chinese trade and CPI data for further insight into the health of the world’s second-largest economy. Philippine trade is due on Thursday. China is also a key trading partner of ASEAN countries and India. The latter will release industrial production on Friday, but USD/INR and pairs like USD/SGD may focus more on external risks.

Check out the DailyFX economic calendar for more ASEAN data

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On December 7th, the 20-day rolling correlation coefficient between my ASEAN-based US Dollar index and the MSCI Emerging Markets Index fell to -0.93 from -0.97 from last week. Values closer to -1 indicate an increasingly inverse relationship, though it is important to recognize that correlation does not imply causation.

ASEAN-Based USD Index Versus MSCI Emerging Markets Index – Daily Chart

US Dollar Vulnerable as SGD, INR Gain with Emerging Markets. What are Risks?

Chart Created Using TradingView

*ASEAN-Based US Dollar Index averages USD/SGD, USD/IDR, USD/MYR and USD/PHP

-- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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