Expectations of a narrowing interest rate differential between the US dollar and Asean currencies that will follow the highly anticipated interest rate cut by the US Federal Reserve (Fed) this month, could push regional currencies to appreciate against what will be a weaker greenback.
But while investing in an appreciating currency can be rewarding, market experts remind investors to always consider the risks and mitigate potential losses. Diversification is the key word.
“The expectations of narrowing interest rate differential with the US could favour the appreciation of Asean currencies, especially given that the latter were battered by the mighty US dollar since 2022,” says Nazmi Idrus, head of economics at CGS International.
Among the regional currencies that could benefit from a US rate cut are the Malaysian ringgit, Indonesian rupiah, Thai baht, and Singapore dollar, which he says are “better positioned for sustained upside going into 2025”.
Min Lan Tan, head of the Asia-Pacific Investment Office at UBS Global Wealth Management Chief Investment Office, has a similar view: “As the dollar weakens, APAC currencies should see further upside over the next 6-12 months. With an imminent Fed cutting cycle setting the stage for further broad USD weakness, we move the dollar to least preferred in our global strategy this month and maintain a positive outlook on APAC currencies, forecasting 1.5-3.0% upside over the next 6-12 months.”
Sharp movements
CGS International forecasts that the ringgit will appreciate to 4.40 against the greenback at the end of 2024 from its current level of 4.35 (as of September 4), before depreciating to 4.20 at the end of 2025.
“We think there is still momentum for both consumption and investments to sustain the ringgit until 2025. Also, Bank Negara is perhaps the only regional central bank which could turn hawkish, in our view. That said, current ringgit strength may have been over-extended due to its sharp movements, which we think poses downside risks,” Idrus says.
The Indonesian rupiah is expected to appreciate to 15,650 against the US dollar at the end of 2024 from its current level of 15,490.26 before depreciating to 15,250 at the end of 2025, according to CGS International.
“We think the federal funds rate cuts and low inflation are cues for rate cuts by the Bank Indonesia in Q4 2024. Despite this, a healthier balance-of-payments position as capital inflows improve alongside lower interest rates and a yield-seeking environment should support the currency to appreciate ahead, in our view,” Idrus says.
The Thai baht is forecast to end 2024 at 34.50 against the greenback from its current level of 34.24 before depreciating to 33.60 at the end of 2025.
“Although the outlook for 2024 GDP growth and inflation is largely uncertain amid change in leadership, we believe that these have been largely priced in, which provides for greater upside if conditions improve. The Digital Wallet handout and the Bank of Thailand preference to stay pat could provide upside risks to baht to strengthen ahead, in our view,” Idrus says.
The Singapore dollar is expected to remain relatively stable at S$1.31 against the US dollar until year-end 2024 but may strengthen marginally to 1.30 by the end of 2025.
“We think the central bank may start to signal the easing of the monetary policy as early as October 24 by reducing the rate of appreciation of the S$NEER (the combined index made up of bilateral exchange rates between Singapore and its major trading partners). Thus far, headline inflation has tapered but core inflation is still above the target rate while GDP growth remains resilient,” Idrus says.
Overblown fears
In making these forecasts, CGS International priced in back-to-back federal funds rate cuts starting in September 2024 with the Fed to achieve the terminal rate of 3% by the start of 2026.
“We think US recession fears are overdone but the strength in Asean currencies may persist amid the start of a shift in global fundamentals. This would lead to further Asean-4 currencies’ appreciation, albeit at varying degrees reflecting the domestic growth, inflation, and policy rate outlook,” Idrus says.
The other key currency is the Japanese yen is expected to decline over the longer term as the Fed cuts rates and Japan’s economy continues to normalize, according to latest UBS CIO report.
“As the dollar weakens, we expect cyclical/US yield-sensitive currencies like the Thailand baht and Korean won to outperform. Meanwhile, Australia’s strong growth dynamics and tight labour market suggest the Reserve Bank of Australia will be the last developed central bank to cut rates – we see regional opportunities to go outright long Aussie dollar versus peers like the New Zealand dollar and Singapore dollar. Japanese yen forecasts currently stand at 147 for December 2024 and 140 for June 2025,” says Tan.
By contrast, the rupiah, Philippine peso, Indian rupee, and Chinese yuan tend to benefit the least from declining US yields. In particular, the CNY is also capped by the overhang of the US election as well as China’s poor domestic growth dynamics after another disappointing month of data across both consumption and investment, according to UBS.
“Against this backdrop, the USD/CNY could rise to 7.30 by year-end. For global investors, we recommend hedging CNY exposure over the coming months. Finally, we expect both the Malaysian ringgit and Singapore dollar to rise in line with other currencies in the region (3% over the next 12 months),” Tan says.
