NJA: USD-Asia crosses to extend their upward climb

The prospect of imminent Fed tightening, along with sliding commodity prices, is pushing USD higher still against EM FX. The strong USD trend is expected to persist, especially given the downside surprises in growth indicators of late and the lack of a convincing turn in economic activity in the coming week's data releases. Taiwan's Q2 GDP print last week surprised sharply to the downside at 0.64%y/y (consensus: 2.6%). This week's data from Taiwan are unlikely to provide much cheer, with export growth likely remaining poor at -10%y/y (previous: -13.9%) and CPI inflation edging further into negative territory.

"We see scope for the lagging USDTWD cross to move higher as it plays catch-up to the move in regional USD crosses. In Indonesia, we expect Q2 GDP growth (Wednesday) to slow to 4.6% y/y, the weakest since Q3 2009, while July inflation (Monday) is likely to moderate slightly, to 6.8%y/y (last: 7.3%)," notes Barclays.

BI stepped up FX intervention in Q2 to keep USDIDR in a tight range, partly because of concerns about inflation. However, it is likely to gradually scale back FX intervention as regional currencies are falling and as inflation starts to moderate. Meanwhile, in China, July exports (Saturday) are expected to slip lower to 0.1% y/y from 2.8% in June, while a continued contraction in imports will likely cause the trade balance to widen to USD55bn. 

"While the CNH has been resilient relative to other Asian currencies, we continue to see upside risk for USDCNH in view of the likelihood of authorities granting more room for the exchange rate to adjust to market forces," added Barclays.

There are two central bank meetings next week. India's RBI is expected to keep key policy rates unchanged (Tuesday). However, the RBI's monetary policy stance is likely to turn more accommodative and that the chances of one more repo rate cut in H2 2015 have increased. 

Bank of Thailand is expected to leave rates unchanged (Wednesday), but its guidance is expected to remain dovish given slow growth. With recent indications from Thailand's finance minister that further rate cuts would be of little help to the economy, authorities would likely not stand in the way of THB weakness, even as THB has underperformed of late due to increased market concerns about weak growth and a worsening drought.