Economists at ANZ Bank analyze Asian currencies outlook.

Growth-inflation dynamics will bode well for Asia beyond the near term

With Asia mostly done with hiking while Fed Chair Powell highlighting his hawkish rhetoric, from the perspective of interest rate differentials, Asian currencies will likely remain under downward pressure in the near term. Adding to this is the Yuan’s depreciation. It appears that China’s authorities have reintroduced the counter-cyclical factor in the daily Yuan mid-point fixing. This will help slow the Yuan’s decline but is unlikely to reverse it.

That said, interest rate differentials are not the only driver of FX. After diminished growth premiums over the US in 2021-22, Asia is regaining its growth advantage. On inflation, in a rare turn, Asia is now seeing lower inflation than the US. Inflation concerns have eased in Asia while the US is still grappling with sticky inflation. The macro-environment, specifically growth-inflation dynamics, will bode well for Asia beyond the near term.