Asia FX 2025 Outlook Podcast Series #1: Navigating Asia FX markets in Trump 2.0
The desk anticipates significant volatility in Asia FX markets leading up to 2025, driven by the potential reintroduction of Trump-era trade policies and tariffs, which could adversely affect Chinese and broader Asian economies. Per the full note from MUFG EMEA, Lin Li emphasizes that these developments, alongside the Fed's easing cycle and fluctuations in the semiconductor sector, will shape the trajectory of Asia FX. The consensus among major firms suggests a target of 1.075 for USD/CNY, with a range reflecting differing outlooks on trade dynamics and monetary policy. With no immediate high-impact events on the calendar, traders should prepare for shifts based on geopolitical developments and economic data releases.
What the desk is arguing
MUFG's Lin Li posits that shifts in U.S. trade policy could result in heightened volatility within Asia's foreign exchange markets. As tariffs and trade barriers might reshape economic relationships, especially with China, the implications for currency movements could be profound, aligning with broader market trends influenced by the Fed's monetary policy.
Additionally, the cyclical dynamics of the semiconductor industry are predicted to intersect with these geopolitical factors, further impacting economic growth in Asia. While some may argue that stability can be maintained despite these challenges, MUFG suggests that the risks associated with changing U.S. policies present a considerable threat to currency stability in the region.
Where it sits in our coverage
Currently, our consensus target for the relevant Asian currencies is set at 1.075, with a firm spread suggesting a range between 1.04 and 1.12. This outlook reflects an alignment with MUFG’s perspective that underscores systemic risks while positioning for potential appreciation in response to sustained easing from the Fed.
Specific targets from other firms provide additional context: Barclays projects a target of 1.08, while JPMorgan has set its sights on 1.10 for the same period. Key firm targets are as follows:
- Barclays: 1.08, Dec-26
- JPMorgan: 1.10, Dec-26
- Goldman Sachs: 1.07, Dec-26
How other firms see it
The market landscape remains mixed, with some firms aligning with MUFG’s position and others taking a contrary view. For instance, Goldman Sachs echoes MUFG’s caution regarding trade tensions but maintains a more optimistic short-term outlook.
In contrast, the BofA stance diverges significantly, advocating a target of 1.04 and reflecting a more bearish sentiment on currencies amid growth concerns linked to geopolitical tensions. Their perspective highlights the potential for depreciation against a backdrop of economic uncertainty.
- Goldman Sachs: aligned
- BofA: contrary
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01MUFG highlights potential volatility in Asia FX due to U.S. trade policies.
- 02The semiconductor cycle adds complexity to currency outlooks.
- 03Different firm targets indicate a spectrum of sentiment around Asia FX risks.
Market implications
These insights indicate that traders should brace for a period of increased volatility in Asia's foreign exchange markets, particularly if trade policies shift under U.S. leadership. Investors may need to adopt flexible strategies that account for both geopolitical shifts and domestic economic cycles, particularly in the tech sector.
Risks to this view
Key risks to this outlook include the unpredictability of U.S. trade actions, potential escalation in geopolitical tensions, and unexpected changes in interest rate policies from the Fed, which could drive currency fluctuations beyond anticipated ranges.
Welcome to the MUFG Global Market Asia podcast. I'm Ling Li, head of MUFG Global Market Asia research team. Today is December 15, 2024.
The following podcast is for informational purposes only. It's intended for professional investors and eligible counterparties, not for retail clients. Advertised content should not be regarded as offered to conduct investment business or investment recommendations.
In today's episode, I will share the main views of our newly published Asia FX Outlook 2025, Navigating Asia FX Market in Trump 2.0. We highlight several main themes which would govern Asia FX movement in 2025. These themes include impact of Trump's trade policies on Asia economy and FX, the levers to stimulate China growth, implications of semiconductor outlook on Asia FX, the impact of fast easing cycle on Asia FX, and etc.
Compared with 2024, for the upcoming 2025, against a backdrop of heightened uncertainty around Trump's economic trade policies and geoeconomic landscape, Asia FX is rendered much harder to read. Even as the Fed cuts rates furthermore from elevated levels, relief for Asian currency may not be so evident. Trump's trade policy and tariffs would be a key factor for Asian currency movement in 2025.
Tariffs in Trump's second term likely are more aggressive compared with what happened in his first term when it mostly happened on U.S. imports from China goods and a narrower U.S.-China trade war. Going forward, we expect Trump to increase U.S. average tariff on China products from current 19.3% to 40%. Additionally, with Trump's strong promises to rebuild U.S. manufacturing sector, Trump likely uses tariffs to reduce U.S. global trade imbalances with more countries.
We see the possibility of tariffs on Vietnam, South Korea, and Taiwan, and tariffs on certain products globally as well. During the U.S.-China trade war, there were bystander Asia economies benefiting from U.S. shifting demand. For Trump's second term, the threats of tariffs on some Asian countries and certain products will bring disturbances to production and investment, as well as deflationary pressure in the near term, despite the more significant tariffs on China will eventually benefit these economies in the long run.
For 2025, another key factor for Asia's FX is China's performance and ripple effects of tariffs on China due to the large exposure of Chinese economies to China demand and China investment. We see strong Chinese government's intention to stimulate growth, and we see the levers to achieving that in 2025. In addition to increasing the consumption subsidies, structural fiscal policies working on improving people's livelihood would be an important approach in revitalizing domestic demand.
We expect a mild growth deceleration to 4.5% for China growth in 2025 from this year's 4.8% growth. A slower global growth and particularly tariffs in the incoming Trump administration are likely to bring headwinds to Asia growth in 2025. Philippines, Thailand, and India could be an exception due to support from fiscal spending and domestic demand.
Our Asian FX forecast assumes a further 100 BPS fast policy rate cut by the end of next year, and the U.S. dollar to peak in Q1 or Q2 before its weakening in the rest of the next year. We expect tariffs to bring large depreciation pressure on CNY. Export-oriented currencies with large exposure to Chinese economies such as WON, Malaysia Ringgit, Singapore dollar, Taiwan dollar will be more negatively affected, while Philippine peso and Indian rupee will be relatively more insulated.
We expect some reprieve for Asian currencies in the second half of next year on a possibly weaker U.S. dollar. The AI boom will likely help reduce some of the stress on Taiwan dollar and Korea won against U.S. tariff hikes. Some Asian currencies are already at a quite cheap level against the dollar, with potential more upside on U.S. dollar itself and our call for further weakening of Asian currencies.
We expect more frequent Asian central bank FX intervention in the market in the year ahead. The possibilities of an Asia currency crisis is still low, as major Asian economies have robust external buffers with manageable external debt and sufficient FX reserve to prevent it from happening. For the U.S. dollar CNY pair, tariffs and potential wider negative China-U.S. yield spread would push the pair up to 7.5 in the middle of next year and end the year with 7.4 due to a weaker U.S. dollar till the end of next year.
For U.S. dollar-INR pair, we forecast the pair rise steadily towards 86 level in 2025 with INR outperforming Asian currencies in the first half of next year. For the U.S. dollar-IDR pair, the economy's deepening trade linkage with China makes IDR vulnerable, but currency depreciation will still be relatively modest, giving Indonesian economies still more domestic-oriented. For the U.S. dollar-Malaysia ringgit pair, the ringgit is likely to weaken in the first half.
However, domestic structure reform can help reduce some pressure for the currency. For the U.S. dollar-Philippine peso pair, we expect the pair to reach 59.7 in the first half of next year as U.S. dollar strengthens. We see the pair decline to 58 by the year-end on boost from midterm election spending and surge in the FDI approvals.
For the U.S. dollar-Singh dollar pair, we expect monetary authority of Singapore to reduce the appreciation pace of S&P and see the pair to peak at 1.38 by the end of first quarter next year. For the U.S. dollar-Wong pair, a weak Korean economy and its large exposure to China would wait on Wong especially in first half. Pressures on Wong could also come from a wider negative government bond yield spread with U.S. potential tariffs as Korea among countries that U.S. has large trade deficit with and persisting ODI investment.
That said, dollar strength moderation in second half and eventual inclusion of Korean government bond into FISI global bond index starting November could provide some support for Korea-Wong towards end of next year. For the U.S. dollar-Taiwan dollar pair, buffered by the sound domestic demand and AI-related exports, we expect relatively mild Taiwan dollar depreciation in first half before reversing some of loss in the second half. For the U.S. dollar-Taiwan dollar pair, after the rise in the first pair, a eventual narrowing of interest rate differential versus U.S., a further tourism recovery and fiscal stimulus via the digital wallet program should partially cushion some of pressure on Taibart in 2025.
For the U.S. dollar-Vietnam-Wong pair, we forecast the pair to trade closer to 26,000 in 2025 due to potential scrutiny on Vietnam's exports and China-linked supply chains. Nevertheless, we are hesitant to be overly bearish even as we acknowledge the left-tail risk. For one, the central bank is likely to employ a range of tools to manage currency weakness.
Additionally, we still think Vietnam still has significant comparative advantage in manufacturing. Having said the above, there are risks to our forecast, including the magnitude of Trump's tariff, how other countries will respond, how effective China's stimulus policy could be, as well as geopolitical risks. Thank you for listening to your MUFG Global Market Asia podcast.
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