Asia FX Talk - The Beginning of the End?

Ahead Today

G3: ECB decision, Bank of England Bank Rate

Asia: Philippines BSP, Taiwan Central Bank Decisions, India WPI

Market Highlights

The Federal Reserve held rates but more importantly signaled that the next move would be a rate cut. The decision was more dovish than expected in a few ways. First, the dot plot penciled in 3 rate cuts, which implied a 2024 rate of 4.63% from the current 5.38%. Second, Chair Powell said that the Fed will start to discuss rate cuts amid signs of cooling in both inflation and the labour market, and that the Federal Reserve is willing to cut rates even if the US economy doesn’t dip into a recession in 2024. Third, Chair Powell did not push back against recent easing of financial conditions during the Q&A (see US Rates Strategy – The Pivot has landed).

There was a monumental move in markets overnight. The futures market is now pricing in for 150bps of rate cuts in 2024, the Dollar fell by close to 1%, US 10-year yields dropped to 4%, while the S&P500 rose by 1.4%. All this even as oil and commodity prices remained relatively stable, going some way to reduce inflation fears down the road.

We will have the ECB and BOE later today, and it’ll be interesting to see if these other G10 central banks tango with the Fed.

Regional FX

Asian FX were stronger against the Dollar on the back of the more dovish than expected Fed policy decision. USDCNH fell to 7.14, while SGD strengthened by 0.75% to 1.333. China’s released new yuan loans data which was a touch weaker than expected at RMB1090bn (vs consensus for RMB1300bn rise). Meanwhile, Japanese Prime Minister Fumio Kishida said he would reshuffle his cabinet, following reports of an alleged fund-raising scandal in the LDP. It remains unclear whether these political developments will have any immediate impact on Bank of Japan monetary policy, with the policy decision up later next week. Meanwhile, the Philippines and Taiwan central banks will both release policy decisions. We expect both to keep rates on hold, with BSP likely to maintain a hawkish tone, even as its job becomes slightly easier with the weaker Dollar and lower US rates.