Asia FX Talk - A Cautious Tone

Ahead Today

G3:Eurozone Services PMI, Germany Services PMI, Germany CPI, US Initial Jobless Claims

Asia: Caixin China Services PMI, Singapore COE Premiums

Market Highlights

The Fed tried to strike a more cautious tone in the minutes for the December FOMC meeting, with officials concluding that interest rate cuts are likely in 2024, although noting a high level of uncertainty over how, or if it will happen. While citing progress over improvements in supply chains and the labour market in bringing down inflation, most FOMC participants stressed the importance maintaining a data dependent approach and to keep policy at a restrictive stance for some time. Interestingly FOMC members also said it will be appropriate to discuss the process of stopping balance sheet reduction well in advance of the actual event.

Overall the FOMC minutes also came together with decent US numbers, with lower than expected job openings and reduction in quit rates, indicating continued improvement in labour demand and supply. Meanwhile, ISM Manufacturing surprised slightly to the upside, but this also came with lower ISM Manufacturing Prices paid data indicating continued goods disinflation.

Risk sentiment was still somewhat weak to start the year, but 10-year yields stabilized at 3.91% post these data points. The risk on the Middle East conflict and global supply chain disruptions in the Red Sea would also be key to watch for moving forward.

Regional FX

Asian FX was generally weaker, with THB (-0.3%) and KRW (-0.3%) underperforming. Indonesia kicked off 2024 with auction of local currency debt of $1.6billion and also sold three tranches of dollar bonds worth around $2.05billion. It looks to be front-loading some supply right now when market sentiment is conducive. Overall, Indonesia’s fiscal deficit position is very comfortable at 1.62% as of 2023, and it also has quite a bit of cash on hand. As such, its financing requirements is likely to remain low later in the year, and this should also provide some support to IDR over the course of 2024. We are reasonably positive on IDR and forecast USDIDR at 15,300 in 3 months and 15,000 in 12 months, moving roughly in line with the Dollar as US yields decline.