Moving into 2024, we think the negative ASEAN FX factors of 2023 have peaked. 2023 was not a good year for ASEAN FX. The higher-for-longer US rates theme and China’s disappointing recovery from COVID were key macro surprises that undermined ASEAN FX performance. That said, FX weakness against the USD was broad-based and not exclusive to ASEAN currencies due to USD strength. Against the USD, ASEAN FX (and broader Asia FX) was generally weaker, although a late-year recovery saw the SGD, IDR and THB gain on a y/y basis. However, on a NEER basis, only the MYR ended the year weaker versus the USD.
Standard Chartered in its FX 2024 outlook, expects ASEAN FX to recover against the USD this year. However, the bank expects any turns in the negative drivers to be gradual and laborious, a theme likely to be repeated throughout the year. A key factor is that US rates are likely to stay meaningfully higher than regional rates versus historical trends. It thinks the Fed will cut by only 50bps in H2-2024, while markets have priced in an aggressive six cuts of 25bps each. A pullback on this expectation may give the USD a temporary reprieve. As such, SC thinks the turning point for ASEAN FX has arrived, but the process is likely to be grinding.
Given a likely Fed pivot, we identify five ‘grinding’ pivots for ASEAN FX in 2024 (ASEAN FX – Grinding pivots for the charts): Pivot 1 – Monetary policy divergence; Pivot 2 – Positioning; Pivot 3 – China; Pivot 4 – Electronics; and Pivot 5 – Commodities. On a relative basis, it expects IDR and MYR to be outperformers, followed by SGD, THB and VND. PHP may underperform the ASEAN FX complex.
Standard Chartered thinks the MYR will recover from a relatively weak performance in 2023, as positioning in MY – in terms of onshore USD deposits and foreign bond ownership – is already very unfavourable. Onshore USD deposits may also have not been in sync with the trade balance and are sensitive to FX movements. Higher commodity prices and a continued recovery in MY tourism should support the MYR.
The bank sees room for the net travel balance to widen by another 1% of GDP per annum. However, E&O and opportunistic FX reserve replenishment may be drags on the MYR.
