Asia FX Talk - Is policy tight enough?

Ahead Today

G3: US CPI

Asia: Malaysia Industrial Production, South Korea Base Rate

Market Highlights

New York Fed President John Williams said that monetary policy is now tight enough to guide inflation back to target, but the Fed needs more evidence of cooling inflation before cutting rates. However, he disagreed with Dallas President Lorie Logan’s view that the Fed should start discussing slowing quantitative tightening, given that bank reserves are still far above ample, but acknowledging uncertainty around this process. Meanwhile, across the Atlantic, ECB Executive Board member Schnabel pushed back on the market’s rate cut expectations, needing further evidence of disinflation even as she acknowledged subdued growth prospects for the euro-area.

Tensions in the Middle East and shipping disruptions in the Red Sea continued to build. Houthi militants escalated attacks in the Red Sea, while US and its allies are weighing options for retaliation. The market impact has been much more pronounced in global container freight rates and supply chains, with global oil prices still weighed down by a pickup in US oil inventories as US oil production improves.

The combination of these factors led to the Dollar weakening by 0.2% overnight, with lower US rates and better sentiment on risk assets such as the S&P500 (+0.57%). The key datapoint will be US CPI up later tonight

Regional FX

Asian FX were weaker against the Dollar, with PHP (-0.1%) and TWD underperforming (-0.4%), INR outperforming (+0.12%), and USDCNH at 7.18, and impacted by weaker JPY on the back of weaker than expected wage growth. The weakness in PHP can be partly attributed to recent comments by Finance Secretary Diokno calling for BSP rate cuts, and also data released yesterday showing a larger than expected rise in the trade deficit to US$4.7bn from US$4.2bn the previous month. Capital goods and consumer goods imports have picked up, offsetting lower mineral fuel imports due to lower oil prices. We think PHP should underperform its Asian peers in 2024, reflecting a still large current account deficit and relatively expensive FX valuations, even as inflation should look much better this year and FDI should also pick up. Meanwhile, the Bank of Thailand said there will be a policy briefing on Monday, post a meeting between the Prime Minister and the BOT Governor.