Economics:Asia FX forecasts in 2017and 18

Three major calls are: (i) sharp RMB weakness; (ii) continued pressure on MYR; (iii) a trend-bucking stable outlook for the IDR

    Asian currencies have acted as useful shock absorbers in recent years. Monetary authorities have responded to episodes of risk-off (taper tantrum) and macro realignment (collapse of commodity prices) by allowing exchange rates to adjust without much resistance. Even the Chinese authorities have found out, at considerable loss of reserves, that it is ultimately futile to resist depreciation pressure.

    The narrative of the coming years is clear-Fed rate hikes and de-globalization risks will weigh in on exports-dependent Asia. Accordingly, our exchange rate forecasts for the next two years incorporate sizable depreciation of Asian currencies, led by the Chinese RMB. We find the Malaysian MYR to be the weakest link in Asia-a currency already under-valued as per our models, and yet facing outflow pressures with limited capacity to defend the exchange rate. Our one against-the-trend call is for the Indonesian IDR, which we expect to remain flat (or mildly appreciate) in the coming years on the back of commodity sector recovery and an attractive macro mix.