The latest FOMC meeting in May assessed that “Inflation has not made much progress toward our 2 percent target in recent months”. However, Fed Chair Jerome Powell attempted to ease concerns as he stressed that policy is moving to a restrictive stance and the Fed is not considering raising rates beyond that.
Overall, UOB’s Economics & Strategy team maintains its call for two 25bp rate cuts in 2024, in September and December; although risks are that the Fed could delay the start of the easing cycle.
In the currency market, the belated impact from the Fed’s tightening cycle on the USD is proving more profound. The USD is likely to remain firm in the near term, at least into 2Q24. However, consistent with our view that US interest rates will fall over time, UOB expects the USD to weaken again but likely into 3Q24. The key risk to our bearish USD view is if the Fed keeps rates higher for longer. In the meantime, UOB continues to see Asian currencies weakening through the rest of 2Q24. UOB retains our call for Asian currencies to recover, but only from 3Q24. The main risk to UOB’s cautiously positive view on Asian FX is a sharper-than-expected CNY depreciation.
In the domestic front, the USD/VND mid-price rate climbed to a fresh high of 25,463 in April, in line with the broad USD strength against other Asian currencies. With reduced expectations of Fed rate cuts, the USD/VND may stay elevated for a more protracted period. The State Bank of Vietnam (SBV) mentioned that it had intervened in the FX market in April, which could help to contain volatility. Beyond the near-term external headwinds, UOB expects the VND to draw support from solid fundamentals and the eventual CNY recovery. Our updated USD/VND forecasts are 25.600 in 2Q24, 25.100 in 3Q24, 24.800 in 4Q24 and 24.600 in 1Q25.
