Week Ahead FX outlook:
We will have a flurry of central bank meetings both globally and in Asia next week, even as markets are attempting to cap off the year. The most important of which will be the Fed and the Bank of Japan, but we will also get central bank decisions from Indonesia, Thailand, the Philippines and Taiwan.
Our global team is expecting the Fed to cut rates by 25bps, in a move that was further priced in after the CPI numbers out this week. What’s interesting is that even as the Fed Funds Futures/OIS markets have increased expectations of rate cuts, US longer-end yields have risen this week, driven by increases in term premia. On that note, Fed Chair Powell’s press conference, together with the Summary of Economic Projections could start to signal a slower pace of Fed rate cuts into 2025 on the back of policy uncertainty under Trump 2.0.
The Bank of Japan meeting in December is as live as it could be, even as market expectations have been pushed out to the January meeting for the next rate hike. Regardless of the exact timing, we think the path is quite clear in BOJ normalising policy into 2025, and as such we think JPY can still outperform.
Last but not least, China. The important developments this week were the Politburo and Central Economic Work Conference (CEWC) meetings, both of which reinforced the message of further rate cuts, monetary policy easing, and also fiscal stimulus to support consumption spending and domestic demand. There were important semantic tweaks, including an unprecedented reference to “unconventional countercyclical adjustment” and changing the stance of monetary policy to “moderately loose” for the 1st time in nearly 14 years (from “prudent” previously). Reuters also reported that Chinese authorities are considering allowing the Yuan to weaken possibly to as much as 7.50 in response to tariffs from Trump, all of which generated meaningful whipsaw in CNH/CNY.
Chinese assets and FX markets whipsawed through the week
