EM Asian currencies to advance further on concerns over U.S. Treasury’s Monitoring List, says Scotiabank

The emerging market Asian currencies are expected to advance further on concerns over being placed on or added to the so-called Monitoring List by the US Treasury Department, as the DXY Index is expected to resume its downward trend amid rising risks of US economic slowdown, according to the latest research report from Scotiabank.

Earlier on October 9, Bloomberg reported that the Trump administration is weighing up the inclusion of an agreement on exchange rates in a "mini" trade deal. According to different media reports, the provisions in the agreement are similar to the currency chapter in the proposed USMCA (i.e. revised NAFTA) and closely resemble a transparency pledge included in the G20 statements. It is said the currency pact calls for countries not to devalue their currencies to achieve a trade advantage and to inform each other if they intervene by buying and selling large amounts of currency.

A currency pact considered by the US and China is likely to prompt the yuan appreciation in the run-up to the APEC Summit set for November 16-17, while preventing the yuan from weakening markedly and abruptly.

White House economic adviser Larry Kudlow said Tuesday that "what the president is calling phase-one is moving ahead very nicely," and that US and Chinese negotiators are working through intellectual property theft and have made progress on currency stability.

According to Scotiabank’s analysis, most EM Asian currencies such as the TWD and SGD are running a tight positive correlation with the CNY or CNH. On Monday, US Trade Representative Robert Lighthizer told reporters that the Trump administration still aimed to finalize the phase one deal in time for the APEC meetings in Chile on November 16-17, and he and Treasury Secretary Steven Mnuchin would speak with their counterparts on Friday.

It is believed that the outcome of the planned Friday phone call will take risk-on sentiment to the next level. It is well noted that US Vice President Mike Pence said Thursday that the Trump administration sought to engage with China on candid terms and did not want a "decoupling" of the world’s two largest economies, although he also criticized US companies that failed to adhere to American values while doing business with China, the report added.

In addition, the US Treasury Department is set to release its semi-annual FX policy report that has been delayed from mid-October. The Treasury has established a Monitoring List of US major trading partners that merit close attention to their currency practices and macroeconomic policies.

In the latest report released on May 28, 2019, the Monitoring List comprises China, Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam. Earlier, India and Taiwan were removed from the list in May 2019 and October 2017 respectively.