The broad USD continued weakening in May, which helped some Asian currencies to furtherrecover. The inability of longer-end US yields to rise further, along with flush USD liquidityconditions, emboldened many investors to return to FX carry trades. The INR reboundedsharply and the IDR also did well.

We do not disagree with these carry trades in the near term. We think spot USD-INR can remainroughly stable, as the trade deficit could narrow anew (because of weaker domestic demandfollowing the COVID-19 outbreak), while equity outflows may be capped by expectations of policysupport for the economy. As for the IDR, its “core” balance of payments dynamics look quitesupportive – given a terms of trade gain, manufacturing capacity additions and FDI reforms – andthere is no imminent risk of balance sheet tapering by the Fed.The COVID-19 developments in the region remain unpredictable. Daily case counts in Malaysiaand Thailand have continued to break records, and the MYR and THB have sharply underperformed.Singapore and Taiwan – places with low case counts for a long time – recently saw local outbreaks.That said, the SGD and TWD seem to be relatively less affected. In our view, the reason behindthis could be that Singapore is still on track to achieve “herd immunity” in 3Q21, while Taiwan’scurrent account surplus is simply too large for equity outflows to completely overwhelm. We thinksome investors can consider funding out of these lower yielding currencies in the near term.