U.S.-Asia policy divergence likely to widen further in near-term, says ANZ Research

Asia’s macroeconomic picture has improved, coupled with a rebound in headline inflation. Indeed, data surprises have turned positive since last November, with momentum at its strongest since 2011.

While markets are cognizant of the risk that the United States President Donald Trump administration may pose to Asia, which may derail the nascent rebound, there are signs that President Trump has softened his stance, ANZ Research reported.

The situation in the U.S. is also fluid. With a 25 basis points hike by the US Federal Reserve set to happen at next week’s Federal Open Market Committee (FOMC) meeting, ANZ is now looking for three quarter-point hikes this year (up from two hikes previously).

Apart from China which has shifted to a tightening bias, only a few countries (the Philippines, Malaysia, and Taiwan) will look to tighten in the latter part of the year. In the absence of a near-term policy response in Asia, monetary policy between the U.S. and Asia will diverge further, underpinning the USD against Asian currencies.

Further, there is little threat to core inflation in most Asian countries, reflecting still weak domestic demand pressure in countries like South Korea and Thailand. The pass-through of higher energy prices into core inflation has been modest in India, Indonesia, and Malaysia.

"In the case of India, core inflation is expected to remain sticky at around 5 percent as the negative impact of demonetization on demand gradually fades in FY2018, due to the normalization of currency in circulation," the report commented.

Also, the relatively low risk of generalized price pressures in most Asian countries will likely keep Asian central banks on hold, at least through mid- 2017. This, coupled with the risk of a faster pace of tightening in the U.S., will bode ill for Asian currencies.