Week Ahead FX outlook:
The US dollar index (DXY) ended the week largely flat as prior week's closing price, with market reaction to Trump's latest tariff threat limited (25% tariff on automobile, semiconductors and pharma) and that the DXY gain was then offset by stronger JPY supported by BOJ's hawkish signals, Japan's 4Q GDP beat and stronger CPI inflation prints especially excluding fresh food.
What we have observed thus far is that the market is getting more sceptical about and feeling numb towards Trump's new tariff plans, and perhaps seeing it more like a negotiation tool for Trump. His mention of the possibility of reaching a new trade deal with China last week was one good example, though China's response to US has been lukewarm. The other driving factor of the DXY index, and to some extent broader Asian currencies were the Japanese Yen. Better economic growth, hotter CPI prints, rising wage growth and hawkish comments from the BoJ officials helped to push the 10y JGB yield higher, which in turn narrowed the yield differential with US and led JPY stronger. While the case for further rate hiking is strong, we do not expect the BOJ to hike rates again until the Trump's tariff plan is clearer, and that the next rate hike likely to be delivered in July right after the Upper House elections (Global Markets Monthly – February 2025)
The key highlight for Asia this week would be the Bank of Korea and Bank of Thailand policy rate decisions. We expect the BOK to cut rates by 25bps to 2.75%, and the BoT to also lower the policy rate by 25bps to 2.0%. The motivation for the cuts is to support growth amidst a good disinflation progress. Beyond Asia, we would likely see US core PCE inflation slowing on year-over-year basis to 2.6% yoy but edging up from prior month (+0.3% mom).
Strong JPY supported the broad sentiment on Asian currencies to some extent
