Tracking Asian EM currencies, US labor market discrepancies, and BoJ moves

Evaluating fair value of Asian EM currencies against the USD

The USD Index and US Treasury yields have retreated somewhat from their long-lasting strength, as inflation moderation in April was relatively aligned with expectations. Let’s explore Asian emerging market (EM) currencies in terms of their fair values based on purchasing power parity (PPP) and interest rate differentials.

Purchasing power parity (PPP)

All listed Asian EM currencies are undervalued relative to the USD based on PPP or the law of one price. The degree of undervaluation ranges from mild in INR, TWD, and THB to significant in VND, PHP, and IDR.

Interest rate differentials

With the global monetary cycle still dominantly in focus, led by the Fed, interest-rate differentials could provide insights into FX values, including carry trade strategies. The short-term (2-year), medium-term (5-year), and long-term (10-year) differentials show that most Asian EM currencies appear to be undervalued, except for a possibly overvalued INR.

In conclusion, while many Asian EM currencies seem undervalued against the USD, the persistent inflationary pressures and economic resilience of the US may not allow the USD to weaken significantly in the near term, potentially limiting the appreciation of these emerging currencies.

United States: Are the non-farm payroll figures misleading the market?

This chart looks at two key labor market figures: non-farm payrolls and the Quarterly Census of Employment and Wages (QCEW). To make them comparable, we’ve aggregated the non-farm payroll figures to a quarterly frequency. 

Non-farm payrolls are a leading indicator for the US labor market. Published monthly frequency, they provide a high-frequency snapshot of employment trends. 

In contrast, the QCEW program publishes a quarterly count of employment and wages reported by employers, covering more than 95% of US jobs. 

The chart shows a historically significant spread between these two indicators. So which one more accurately reflects the current state of the labor market? 

Markets weigh up BoJ rate hikes amid excess inflation but low real wage growth

The Bank of Japan (BoJ) is in tightening mode, which contrasts with the approach of major global central banks leaning toward monetary accommodations. 

The chart shows expectations of higher policy rates, as evidenced by rising 2-year government bond yields and 2-year swap rates. This trend is further supported by elevated core inflation (excluding fresh food and energy), which has been in positive territory and is the highest observed in decades, recently reaching 2.9% in March. 

However, despite the BoJ’s intention to see sustainable wage growth to support rate hikes, real wage growth in March remained relatively flat. Additionally, economic growth falling below expectations does not bolster the central bank’s {{nofollow}}hawkish stance.

Tracking the RMB's growing share of global payments and transfers

De-dollarization has been a topic of debate over time, with the use of other currencies gradually increasing. 

This chart shows the growing role of the Chinese renminbi (RMB) in global financial transactions. 

Despite the significant rise in RMB usage for China’s overseas transfers and remittances, with the RMB surpassing 50% and overtaking USD shares in these areas, its share of global payments and trade finance markets remains around 5%, according to SWIFT. This indicates that while the RMB is gaining ground, the USD continues to dominate global transactions.

HK and China EPS estimates: recent upgrades for future years

While Hong Kong and China equities have been performing relatively well lately and have already reached their golden crosses, let’s revisit their earnings estimates.

The predictions for earnings per share (EPS) for both regions have been revised downward compared to six months ago. However, in the past three months, their EPS has been upgraded for the next few years (2025–26), despite remaining unchanged for this year in Hong Kong and experiencing a downgrade in China. This shows the market’s optimism for earnings growth in the medium term, despite some short-term revisions.

SF Fed news index v US consumer perceptions

This chart compares US economic news using {{nofollow}}the San Francisco Fed’s News Sentiment Index, with US consumers as measured by three indexes, illustrating the relationship through regression analysis.

The UMich index, which is influenced by personal finances, inflation and retail gas prices, shows that consumers have been more pessimistic compared to the economic news. 

The Conference Board (CB) Consumer Confidence index, which is closely tied to resilient labor conditions, indicates that US consumers have been more optimistic than economic news suggests, 

Overall, US consumer perception, derived from both the UMich and CB indices using PCA, appears to align with economic news but leans somewhat toward pessimism.