Asia FX Talk - Super-duper-ex core inflation

Ahead Today

G3: ECB Policy Decision

Asia: Philippines Trade, China CPI, China PPI

Market Highlights

The US Dollar strengthened significantly by 1% and US 10-year yields spiked sharply to 4.54%, as markets digested the stronger than expected US CPI release overnight. The headline number came in at 0.378% mom while the core rate rose 0.359%, higher than the consensus forecasts for a 0.3% rise. Beyond just the headline numbers, the details showed that services inflation remained sticky, with items such as transportation services (and especially car insurance), medical care and other personal services rising. While goods inflation has remained soft, and rental inflation is likely to moderate moving forward, the acceleration in services CPI raises questions about whether the inflation pickup in 2024 was really an aberration.

All these certainly serve to make the Fed’s job harder, and markets have moved significantly ahead to meaningfully price out Fed cuts this year. The 1^st cut is now only fully priced for November, while markets are now pricing for less than 2 Fed rate cuts this year. This compares with previous pricing of the 1^st cut starting in September.

Markets will focus on the ECB Monetary policy decision today, to see if there is any guidance on the path for rate cuts. With US yields still elevated, a widening rates divergence between Europe and US could add further upward pressure on the Dollar.

Regional FX

Asian FX markets came under pressure with USDCNH at 7.261, USDSGD and USDKRW spiking up by 0.6%, while THB weakening by 0.9% up to 36.71. While some Asian markets are closed for holidays, currencies sensitive to US rates such as IDR could come under pressure when their markets open. It’ll be interesting to see how the PBOC manages the onshore USDCNY fix with the stronger Dollar and if the central bank continues to maintain a stable fix despite global factors. Meanwhile, the Bank of Thailand kept rates on hold at 2.50%, with 2 out of 7 Monetary Policy Committee members voting for a cut (same as the last meeting), while continuing to highlight that monetary policy cannot solve structural issues. On this front, the Thailand government has announced funding for the digital wallet policy, which is likely to start from 4Q2024, and will be funded by a mix of FY2024 and FY2025 budget, together with policy banks. South Korea’s parliamentary elections held yesterday showed the ruling conservative People Power Party losing seats, with the opposition Democratic Party set to expand its majority with about 172 seats and the Rebuilding Korea Party likely landing 10 seats. This result could indicate that business friendly reforms such as abolishment of capital gains tax and tax reforms and incentives to boost stock valuations could be more difficult to pass.