Asia FX Talk - Dovish Tilt - 2 November 2023

Ahead Today

G3: Bank of England Meeting

Asia: BNM Policy Rate

Market Highlights

The Fed kept rates on hold as expected at 5.25-5.5%, but tilted dovish in three ways. First, the statement gave a nod to financial conditions tightening potentially weighing on economic activity, in a reference to the sharp rise in long-term US rates. Second, Chair Powell played down the September meeting dot plots which had incorporated another rate hike this year, and as such, possibly indicating some change in views among FOMC members around a December hike. Third, Powell said it was “likely” slower growth and some softening in the labour market is needed to fully restore price stability, but did not seem dogmatic about it, even as he gave a nod to the progress on inflation and labour market so far.

In some ways, the FOMC was a bit of a side dish for the markets overnight. The bigger market movers included a surprise drop in the US ISM Manufacturing Index, together with a US Treasury Refunding announcement which had smaller than expected financing needs for longer-term coupon notes.

All-in, the yield curve bull flattened with a sharp drop in 2-year yields to 4.92% and 10-year yields to 4.71%, S&P500 was up 1%, while the Dollar weakened by 0.4%. Looking ahead, the Bank of England is expected to hold rates, but the post-policy comments will be looked at closely in terms of tone.

Regional FX

Most Asian currencies were stronger against the Dollar, following the broader dollar trend. Several Asian countries released Manufacturing PMI estimates, which showed some slowdown in Korea, Vietnam, Thailand and Indonesia. China’s Caixin Manufacturing PMI was weaker than expected at 49.5 from 50.6 previously. Indonesia’s inflation remains low and manageable at 2.6%yoy. We continue to think the Indonesia’s macro fundamentals look quite decent with low inflation and manageable fiscal deficit, notwithstanding some factors outside of its control such as lower coal and palm prices and elevated US yields. As such, we think sharp spikes in USDIDR are unlikely, assuming we are right that US yields moderate further from here. We will have Bank Negara Malaysia’s monetary policy decision today, where we expect OPR to remain on hold at 3%.