January 27, 2021 at 06:00AM

Will the US Dollar fall versus the Singapore Dollar, Taiwanese Dollar and Philippine Peso if a fiscal stimulus delay pressures Treasury yields? The Fed and earnings may keep risk appetite intact

US DOLLAR ASEAN WEEKLY RECAP

Last week, the haven-linked US Dollar cautiously weakened against its ASEAN counterparts, such as the Singapore Dollar and New Taiwan Dollar. It also saw some weakness against the Indian Rupee, but losses were modest. All things considered, it could have been worse for the anti-risk Greenback considering another solid week for Emerging Market indices as the EEM hit record highs – see chart below.

Notable standouts were the Indonesian Rupiah and Philippine Peso. USD/IDR gained as the Bank of Indonesia left benchmark lending rates unchanged, signaling the intent to keep borrowing costs low until there are signs that inflation is rising. Policymakers also reiterated their stance on maintaining stability in the exchange rate. USD/PHP was little changed as 3-month implied volatility plunged to the lowest in over 20 years.

US DOLLAR, EMERGING MARKETS INDEX – LAST WEEK’S PERFORMANCE

US Dollar Forecast: Stuck Between Treasuries, Equities as Emerging Markets Push On

*ASEAN-Based US Dollar Index averages USD/SGD, USD/IDR, USD/TWD and USD/PHP

EXTERNAL EVENT RISK – US FISCAL BETS, TREASURY YIELDS, EARNINGS SEASON, FEDERAL RESERVE

ASEAN and Emerging Market currencies can be quite sensitive to general risk appetite, especially against the US Dollar in today’s low-interest-rate environment. What may be keeping the USD from falling more aggressively is the story of Treasury yields ever since Democrats took control of both chambers in the legislative branch. That increased prospects of more aggressive fiscal stimulus.

As a result, longer-dated government bond yields rallied, offering the US Dollar some appeal. In fact, Treasury yields even outpaced government bond rates from ASEAN countries earlier this month. So while market mood has broadly remained upbeat, the Greenback has notably slowed its descent as of late. My ASEAN-based USD index is now more closely following Treasury yields – see next chart below.

Ktafx

Might this change over the remainder of the week? Prospects that another Covid relief fiscal package may not arrive before the middle of March sank Treasury yields to start off the week. Equities also recovered after this announcement, perhaps enjoying what has been a rather rosy fourth-quarter earnings season. Still, all eyes are on key tech reports from Apple, Microsoft and Facebook. More of the same may keep investors upbeat.

Keep a close eye on the FOMC monetary policy announcement. While lending rates are expected to remain unchanged on Wednesday, markets will likely focus on commentary about the US$120 billion in monthly asset purchases. Last week, the central bank’s balance sheet climbed to its highest yet, around US$7.42 trillion. With tapering likely being some ways off, the Greenback may remain under pressure.

fonecable

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