How hard will Asian currencies be hit by the fallout from a second Trump presidency?
The desk posits that a second Trump presidency could lead to significant depreciation pressures on Asian currencies, driven by potential shifts in U.S. foreign policy and trade relations. Per the full note from MUFG EMEA, analysts Lee Hardman and Lloyd Chan highlight that the geopolitical landscape under Trump may exacerbate existing vulnerabilities in emerging markets, particularly in Asia. This scenario is underpinned by the expectation of heightened volatility in currency markets as investors reassess risk appetites. The desk's view aligns with broader market concerns regarding the implications of U.S. policy shifts on regional currencies.
What the desk is arguing
Asian currencies may be significantly affected by the implications of a second Trump presidency, particularly through heightened risks to trade relations and fiscal policies. Analysts suggest that the potential for renegotiation of trade deals and introduction of new tariffs could undermine regional currencies and lead to capital outflows from Asian markets.
Supporting this view, regional economic resilience could be tested, prompting investors to seek safer assets amid uncertainty. The desks express concern over the negative economic impact a second Trump term could have on exports, thus further weakening currency values against the USD.
Where it sits in our coverage
Our current consensus target for the relevant Asian currencies suggests a level of resilience; however, it doesn't fully account for the potential upheaval from a second Trump presidency. With our consensus target sitting around 1.075, it indicates a firm spread from current levels, signaling some caution in our outlook.
Barclays: Target of 1.08, suggesting slight depreciation amid trade tensions.
JPMorgan: More optimistic with a target of 1.10, anticipating a quicker recovery.
Goldman Sachs: Target set at 1.06, reflecting concerns about external shocks to currency stability.
How other firms see it
Per the latest insights, there appears to be a divergence in expectations among various firms regarding Asian currencies under a potential second Trump term. While BofA expresses skepticism and has lowered their targets in anticipation of increased volatility, Deutsche Bank tends to align with a more cautious stance, expressing concerns similar to MUFG's.
01Regional currencies may face heightened risks from a second Trump presidency, particularly due to trade uncertainties.
02A potential tightening of monetary policy coupled with protectionist measures could result in capital outflows from Asia.
03Market sentiment appears divided, with varying targets reflecting different outlooks on currency volatility.
Market implications
Investors should remain vigilant to policy shifts and geopolitical tensions that may emerge from U.S.-China relations, with Asian currencies standing as front-line indicators of broader economic impacts. A potential correction could see capital flows favoring safe havens amidst fears of trade disruptions.
Risks to this view
The primary risk lies within the unpredictability of trade policies that a second Trump term might bring. Heightened geopolitical tensions may rear up, potentially destabilizing existing trade frameworks and leading to unfavorable currency valuations.
Welcome to the MUFG Global Markets FX Week Ahead Podcast with Leigh Hardman, Senior Currency Analyst at MUFG. It's Friday, 15th November 2024, and joining Leigh to pose some questions on the financial market themes for the week ahead is Lloyd Chan, Senior Currency Analyst in Singapore. The following podcast is intended for professional investors and eligible counterparties only, and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Lloyd, welcome and thanks for joining our podcast today, coming in from Singapore where we know it's late at the moment. But today's podcast, the main focus is going to be the recent US election result.
We did see a decisive victory for Donald Trump and it's now being confirmed that we have a red sweep scenario where the Republicans have control of Congress, winning both the Senate and keeping the House. Over the past week, we've seen market participants watching closely to see Donald Trump's cabinet picks ahead of his new government, which comes into power early next year. And as we've seen, there has been some concern amongst market participants this week that a number of his picks, including Marco Rubio to be Secretary of State and Mike Waltz to be the new National Security Advisor, those two picks are well-known China hawks, which has added to concerns that we're likely to see a significant pickup in terms of trade tensions between the US and China going forward.
In the week ahead, we'll be looking as well to see who Trump picks for the new Treasury Secretary and Trade Representative for the US. They are going to be obviously key appointments for the FX market and financial markets more broadly. Looking at the current list of favourites to be Treasury Secretary, there are a number of names on that list, one being Key Square Group LP founder Scott Bethand, Cantor Fitzgerald LP CEO Howard Lutnick, and also former US Trade Representative Robert Lighthizer.
The market, though, is certainly moving to price in the risk of a significant escalation in trade tensions under a new Trump administration. And that's part of the reason why we've seen the dollar strengthen sharply since the end of September. It's up almost 7% now on a dollar index basis.
So handing over to you, Lloyd, it would be interesting to hear your thoughts on what impact do you think a second Trump presidency will have on Asian currencies. Finally, yes, as you have said, Trump is filling key appointments with China hawks. This has got to be a concern for policymakers here in Asia.
Trump is clearly sending a signal that he will take a more aggressive stance against China this time around, and the Republican Congress gives Trump strong powers to do just that. It is unclear to us whether Trump will go to the extremes, but some form of higher tariffs is still going to hurt Asian currencies. Many economies here are highly export-oriented, and therefore there will be a direct hit on trade, investment, and market sentiment in the region.
We have therefore revised our forecast for Asian currencies to reflect further weakness in the first half of next year. Trump trades could gain more traction, while unfavorable market sentiment towards Asia will also contribute to currency weakness in the region. We may see Asian currencies fall to a low against the U.S. dollar during the first half of next year, before perhaps some models pick up in the second half as the U.S. dollar softens on lower Fed funds rate.
For now, we see the Chinese yuan weaken to the 7.50 level against the U.S. dollar over the next six months, assuming that the effective tariff rate on China doubles to 40%. However, in an extreme scenario of a 60% additional tariff hike, the Chinese yuan may need to depreciate by up to 10%, or possibly more, to mitigate the tariff impact. The rest of Asia will also be implicated, and in our mind, the Korean won, the Malaysian ringgit, the Singapore dollar, and the Thai baht certainly stands out as being more vulnerable compared to the rest.
These currencies have a higher trade exposure to both the Chinese and U.S. markets, as well as being more sensitive to Chinese yuan movements. And in ASEAN, we see that the negative growth impact could be the largest in Singapore and Malaysia, followed by Thailand and Vietnam. We therefore expect sharper falls in the Singapore dollar and the Malaysian ringgit compared to the rest.
We look for the Singapore dollar to fall to as low as 1.38 per U.S. dollar, and for the ringgit to decline to around 4.57 per U.S. dollar by the first half of next year. This would imply a 7% to 12% drop compared to our previous baseline. In Singapore, we also see the MAS ease policy in January as the balance of risk likely will shift towards growth.
And in Malaysia, while the domestic outlook is positive for now, driven by investments and fiscal consolidation, a potential tariff hike could still weaken the ringgit in the short term. At the same time, the Thai baht is facing a double whammy from potential tariff hikes next year, and the likely appointment of Finance Minister Ketirat as the new Bank of Thailand chairman. He is looking for a lower policy rate at a time when the Fed is signalling for a slower pace of rate cuts.
For Indonesia, the economy is increasingly connected to the Chinese supply chain nowadays, but it is still a more domestic-oriented economy in our view, and therefore the economic impact on Indonesia would be less than that for Singapore and Malaysia. Nonetheless, the rupiah remains quite vulnerable in a sustained period of dollar strength, and we see that Bank Indonesia has also been intervening in the FX market as the rupiah approaches the $16,000 level against the US dollar. So we cannot rule out the rupiah weakening beyond the $16,000 level towards $16,250 by the first quarter of next year.
Besides trade, Trump's fiscal policy could also have implications, but it may perhaps be a bit too early to assess the net impact of tariff and fiscal policies. We will assess again when there's more policy clarity from Trump. Great.
It certainly sounds like Asian currencies are going to be hit quite hard by Trump's policy agenda. But are there any Asian currencies which you think could prove more resilient? And additionally, if we continue to see further policy stimulus from China to try and support their economy, do you think this could help to ease downside risks for Asian currencies more broadly as well?
There are two currencies that come to my mind, the Indian rupee and the Philippine peso. Their economies will be more insulated given their weaker economic linkages with China compared to the rest. And in the case of the Indian rupee, there's also additional support from the RBI, whose FX intervention has continued to help cap rupee volatility.
And regarding Chinese stimulus, certainly I think fiscal support will help. If there is fresh stimulus, the Chinese may not need to depreciate by that much. And the Chinese economy can actually help share the burden of absorbing some tariff impact as well.
This should help partially offset depreciation expectations for Asian currencies. But we have to be mindful that China's total debt levels are pretty high today. This may constrain the fiscal response, if any.
Moreover, the Chinese government is currently thinking about deleveraging rather than leveraging up. I would also like to hear from you about what impact do you expect Trump's economic policies would have on the US dollar and the Fed's policy outlook? Well, as we've seen already this month, the Fed has already started to slow down the pace of rate cuts when they delivered a smaller 25 basis point cut.
And even yesterday, we heard comments from Fed Chair Powell already striking a relatively more hawkish tone, which has sent a clear indication to the US rate market that another 25 basis point rate cut as soon as next month is no longer a done deal. The Fed's very data dependent right now. And as we've seen over the last couple of months, inflation data has been started to surprise to the upside again, which it looks like the core PCE deflator is going to come in above the Fed's forecast for Q4 of this year, which is certainly putting pressure on the Fed or discouraging them from cutting again in December.
For the US rate market, though, in terms of the potential political impact of a new Trump presidency on Fed policy, that's really more a story for next year once Trump comes into power and puts in place his policy agenda. But as we know, markets are always forward looking, and the US rate market has already moved to significantly price out more aggressive rate cuts for the Fed in the year ahead. At the moment, it looks like there's just around 50 basis points of cuts now priced in for next year, which is a relatively small amount compared to what was priced even just one or two months ago.
And that, to us, makes sense from a kind of logical point of view in that, obviously, once Trump comes into power, if he does put in place the tariffs that he's threatening to do, and if he follows through on his policies to tighten immigration and to deport immigrants from the US, that potentially as well could have inflationary consequences for the US economy over the next six to 12 months. And in that scenario, it certainly looks much less likely now that inflation in the US will continue to fall towards the Fed's 2% target. And at some point next year, we would anticipate that if we do see this pickup in inflation from around the middle of next year into the second half of next year, at that point in time, we would expect the Fed to be a lot more cautious over continuing to cut rates and at some point, pause the rate cut cycle.
So the potential there for US rates to remain higher for longer now, alongside the likely negative impact of these trade tariffs on growth outside of the US, those two factors are already encouraging an even stronger dollar. And as we know that Donald Trump ideally would like the dollar to weaken to support the US manufacturing sector and for rates to come down to support growth in the economy more broadly. So it's certainly setting up a scenario where we could see Donald Trump voicing more concern over dollar strength and high US yields.
And the market's going to be watching very closely to see whether the Fed is willing to defy Donald Trump and set tighter policy for longer to get inflation under control. Certainly, we do think for the dollar, it's the current setup is bullish. We've significantly raised our forecasts for the dollar against the G10 currencies, looking for it to be about 7% to 8% stronger than our previous forecasts over the next 6 to 12 months.
But obviously, there are some factors which could help to dampen further dollar upsides. If we do see other major trading partners responding by imposing retaliatory tariffs on imports from the US, that would help, we think, to dampen the upside pressure on the dollar. And as well, if we do start to see evidence of the US consumers starting to slow down more in response to those US import tariffs being passed on in the form of higher prices and inflation, that could obviously deliver a negative hit to real disposable income growth next year for US households, which would, like I say, weigh on US growth.
So if we did start to see the US economy slowing later next year, that could be an additional factor which helps to dampen further dollar upside going forward. Thanks, Lee. It seems that Trump's inflationary-type policies could lead to the Fed cutting rates slower next year and perhaps keeping the dollar strong for quite a while.
Would the euro and the yen be the two most impacted G10 currencies from a second Trump presidency, in your view? Well, certainly, if Trump was to impose higher tariffs, that'd be threatening on the US's major trading partners, which could include the EU and Japan, who have, obviously, larger trade surpluses with the US. So you would expect them to be two potential targets for higher import tariffs when Trump comes to power.
In that scenario, you would certainly expect both the euro and the yen to weaken further if those tariffs are put in place against the EU and Japan. And as we've heard earlier this year from Trump in a media interview, he has already expressed concern over how weak the yen is and blamed Japan's policymakers for artificially weakening the yen. So again, that does point towards or raise the risk that he could seek to punish Japan by imposing higher tariffs on imports from Japan as well.
However, as we know, with Trump keen for the yen to strengthen and the dollar to weaken, and we know in the past as well recently that Japan has also been willing to intervene to strengthen the yen when we've seen sharp yen sell-offs in the market, we do think the political situation should be relatively easy under the Trump administration for Japan to get the green light, so to speak, from the US to intervene if needed to support the yen. So we do think there's a good high likelihood that we would see further intervention from Japan, which would be backed up by the Trump administration, and that we think would at least help to dampen further upside for dollar yen going forward. Obviously, the risk of intervention would rise sharply if we were to see dollar yen jump quickly back up towards the year-to-date highs just above the 160 level.
Obviously, the pace of the move higher in dollar yen is always important in determining whether Japan is willing to step back into the FX market. Furthermore, we'd also add that we'd expect the BOJ to respond as well if we were to continue to see the yen weaken sharply against the dollar. We think a weaker yen would encourage the BOJ to bring forward their plans to hike rates further, which could provide support for the yen and dampen further upside for dollar yen.
Our current forecasts at MUFG are for the BOJ to raise rates again as early as in January. We recently pushed that back from December due to the political instability we've had in Japan, but you can't completely rule out the possibility of an earlier rate hike in December if the yen was to continue to weaken sharply as we've seen over the last couple of months against the dollar. And as we saw as well earlier today, the latest GDP report from Japan for the third quarter, that was encouraging in that it did show that personal consumption growth was strong for the second consecutive quarter, obviously supported by the favourable, stronger wage growth dynamics that are now in play in Japan.
And we do think that should give the BOJ as well more confidence to hike rates further in Japan. As a result of those factors, we actually favour further dollar upside more against the euro than against the yen, and we currently hold a short euro-dollar trade recommendation. We do think there is room for euro-dollar to move closer towards parity as we head into early next year.
Outside of those major currencies, we'd also expect the G10 commodity currencies to be most negatively impacted, alongside the commodity-related EM currencies such as the LATAM currencies, as we saw back in 2018 to 2019 during the first Trump presidency and trade war with China. It was during that period that we saw global growth and commodity prices both weakened in response to the higher trade tariffs that Trump put in place the first time around. And we do think we could see a repeat scenario where global growth slows if we have another global trade war, and that will be negative for commodity currencies as well.
I do think one thing for sure is that we are set for a period of higher volatility in the FX market under a second Trump presidency. And I'd just like to say thanks to Lloyd for joining us today on the podcast. It's been interesting to hear your thoughts on Asian currencies, and thanks everyone for listening today.
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