The USD rally and Asia

The US dollar resurgence had captured the market’s attention of late and with Asian markets closely entwined with the greenback’s trajectory, it is worth examining whether the impact is here to stay.

Hong Kong central business district
Source: Bloomberg

US dollar rebound

After seeing the US dollar index slide and struggle around the 90.0 figure, we finally have a return of US dollar strength with the index up at 93.30 levels when last checked. A confluence of factors including the elevated US government bond yield and the faltering of other developed markets’ economic indicators were seen contributing to this development. Specifically, the euro, which is also the most heavily weighted within the index, slipped substantially against the dollar on the back of slowing inflation and production numbers in the region.

USD/Asians

The ensuing impact on Asian currencies cannot be missed with the USD strength likewise leading multiple USD/Asian higher. Recapping on the trajectory of USD/Asian pairs for the past 1-month period, all but EMFX USD/PHP rose with the INR leading losses, followed by SGD and THB. The USD/SGD pair specifically saw prices defying the Monetary Authority of Singapore’s latest tightening move, bouncing up to eye the $1.35 figure into May. That being said, as with the trend in EUR/USD, prices have certainly ventured into overbought territory, putting into question whether a stall or reversal could be due.

Fundamentally, the factors mentioned above support further strengthening of the US dollar in the near term even as normalisation is eventually expected from the likes of the ECB and the BoJ that would be USD bearish. The question would be the clearance of major resistance as seen here with the $1.35 strong resistance that would fuel further momentum for the currency pair.

USD/SGD

Asian equities outflow

Alongside the squeeze on Asian currencies, equity markets likewise face the pressure from a stronger US dollar, which erodes the attractiveness of the region. Notably, outflows had been registered for emerging market as reported by Bank of America Merrill Lynch where their weekly data reflected a withdrawal from emerging market equity funds in the week when US 10-year bond yields crossed 3% for the first time in four years. This was as the US dollar index broke from the firm hold around 91.0 levels, sending headwinds into Asian equity markets’ way. Obviously there exists other political and geopolitical concerns to weigh in for this situation against the steady fundamentals for prices, but with the current USD climb, this will be one for the radar.   

As with the consolidation in the US, the Hong Kong HSI is a poignant example caught in a gridlock between 29,700 to 31,000 levels with the abovementioned factors in play. Look for a definitive move with a surge in US yields and the USD likely to be potential fundamental triggers that could push prices out of the zone.

HSI

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