Asia FX Talk - Solid US Q4 GDP supports the US dollar

Ahead Today

G3:US Dec core PCE prices, US personal income, and US personal spending, Japan leading economic index, Euro area corporate and household loans

Asia: Singapore industrial production, trade data in Philippines and Thailand, India bank loan growth

Market Highlights

US real GDP rose by an annualised pace of 3.3% in Q4, beating market consensus for a 2% rise, albeit slowing from 4.9% in Q3. Real consumer spending was up a solid 2.8% at an annualised pace in Q4, with growth in goods spending outpacing services. Contributions from inventories were flat, while government spending and net exports added to growth. Initial jobless claims rose 25,000 to 214,000 in the week ending January 20, but overall trend is still down. GDP price deflator was up less than market expectations. US 10-year yield eased by 7bps to 4.11%.

As widely expected, the ECB left policy rates unchanged. However, messages from its policy statement and press conference appear to be mildly dovish. Indeed, the council’s inflation assessment had become more benign, with President Lagarde pointing to “almost all measures of underlying inflation declined further in December” and “measures of shorter-term inflation expectations have come down markedly”. The council also assessed that past rate hikes continue to be “transmitted forcefully”. And the economic outlook is weak, with the council assessing risks are tilted to the downside. While president Lagarde pushed back on speculation of an early rate cut by describing it as “premature”, the council’s benign inflation assessment leaves an April rate cut possible. EUR/USD fell 0.4% and front-end rates have dropped more notably.

Regional FX

Meanwhile, brent price rose 2.8% amid stronger US Q4 GDP and ongoing tensions in the Red Sea. Markets have reacted positively to the PBOC’s 50bp cut to the reserve requirement ratio and reports of a package of measures to support Chinese equities. The Shanghai composite equity index has rebounded 6.6% after hitting a new low on Tuesday.

Regional FX

The US Dollar Index (DXY) gained 0.3% versus major currencies on Thursday. And across the Asia region, US dollar gains were driven mainly by USDIDR (+0.7%), followed by USD/PHP (+0.4%) and USD/CNH (+0.3%). USD/SGD also gained, albeit modestly by 0.1%, while our S$NEER estimate traded at 1.3% above the mid-point. However, the US dollar saw declines of 0.1% versus both the KRW and TWD.

The Indonesian rupiah is facing election risks. With President Jokowi constitutionally barred from running for a third term, Indonesia will be electing a new president on 14 February.

Advanced estimates showed South Korea’s GDP rose 0.6% q/q (2.2% y/y) in Q4. This beats market consensus for 0.5% growth and maintains a similar sequential pace of growth since Q2. Net exports were the key driver of growth, reflecting the general improvement in regional exports.