Asia FX Talk - BNM preview: OPR to stay at 3%

Ahead Today

G3: US initial jobless claims, ECB policy decision

Asia: BNM policy meeting, Taiwan inflation, China Feb trade data

Market Highlights

There is no surprise for markets thus far at Fed Chair Powell’s semi-annual monetary policy testimony to Congress. Powell said that rate cuts are likely “at some point this year”. But he also reiterated that there is no hurry to cut rates until policymakers are convinced that inflation is back sustainably closer to the 2% mark. He acknowledged the outlook for growth is uncertain and the Fed’s 2% inflation target is not yet assured. Meanwhile, ADP employment increased by 140k in February, following a 110k rise in January, albeit below market expectations for 150k. Job gains were broad-based across sectors, led by leisure and hospitality. Markets will await the government’s employment numbers out this Friday to reassess the health of labour market conditions. US mortgage applications rose 9.7% in the week ending March 1, after -5.6% in the prior week, but remaining in a downtrend. And the 30-year mortgage rates have stayed above 7%. US 10-year yield fell 5bps to 4.1%, retreating from year-to-date highs of around 4.32%, while the broad US dollar index softened 0.3%. There is little change to market pricing for the path of fed funds rate this year at 3 or 4 cuts. 

The ECB will likely keep rates unchanged today. We think the ECB will continue to push back against early rate cuts, limiting the scope for a big drop in yields. Japan’s nominal labour cash earnings rose 2%yoy in January, from 1% in December, strengthening the case for the BOJ to exit negative interest rate policy in the short term.

Regional FX

Asian currencies have broadly strengthened against the US dollar following Fed Chair Powell’s comments. Notably, the IDR, MYR, SGD, THB, and KRW appreciated by 0.4%-0.5% against the US dollar. But USDCNH was stable.

A key highlight today is Bank Negara Malaysia’s (BNM) policy rate decision. We expect BNM to maintain a balanced tone, keep its Overnight Policy Rate (OPR) unchanged at 3%, and reiterate that ringgit weakness has been due to external factors and not reflective of domestic economic fundamentals. We think BNM will not raise rates to support the ringgit. Inflation has been less of a worry, as it has gotten back to a benign pace. Headline CPI inflation steadied at 1.5%yoy in January, while core inflation was at 1.8%yoy. The risk of pass-through of a weaker ringgit to domestic inflation is also contained. Moreover, we believe BNM will want to avoid putting further pressure on households. GDP growth in Q4 2023 slowed to 3%yoy (-2.1%qoq sa), partly due to a slowdown in private consumption growth to 4.2%yoy (-3%qoq sa), from 4.6% in Q3. Meanwhile, lowering rates would add to ringgit headwinds.

Malaysia has a current account and trade surplus, which should provide some support for the ringgit. Moreover, recent verbal intervention by the authorities, including plans to engage with government-linked companies to encourage conversion of overseas earnings back to ringgit, could help draw a line in the sand for the USDMYR at 4.80. Once US cut rates and market sentiment towards China’s economy improves, the ringgit will likely get a reprieve. We look for the ringgit to remain above 4.70 against the US dollar in H1 2023, before strengthening to end the year at 4.60.

China’s commerce chief said yesterday that exports rose 10.3%yoy in January-February combined, while imports rose 8.2%yoy. The actual trade data release is scheduled for later today. PBOC governor sees scope for a reduction in the reserve requirement ratio, while a relending facility for tech and innovation will be set up to help foster tech self-reliance.