- Asian foreign exchange rates (FX) appear far less sensitive to US rates, and more impacted by the US yield curve and US equity returns. A flatter curve (little difference between short-term and long-term bond rates of return) with weaker equities would be the toughest environment for Asian FX, while continued gains in equities would moderate any fallout.
- Our base case is for the renminbi to be stable in 2022 as China’s sealed borders prevent outbound travel and to support the current account surplus. But a more infectious variant could increase the economic costs relative to the health benefits in China. The need for lower rates (policy easing), or a significant shift away from “zero-Covid” could be risks to the renminbi.
- While more Asian central banks will start hiking rates in 2022, this is likely to be slower than in other emerging markets. See figure 4. Inflation is set to be close to or below central bank targets everywhere in the region except India. The lost economic output during Covid will take time to recover. And private sector credit growth is mostly still very weak, especially in Southeast Asia (ASEAN). Moreover, easing by the People’s Bank of China is likely to be in stark contrast to tightening Fed, with Asia straddling this policy divide.
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