Asia FX Talk - Asia FX to consolidate gains on improving regional sentiment

Ahead Today

G3: Speeches by Fed’s Bostic, Barr, Waller, Jefferson

Asia: China’s 1y and 5y loan prime rates

Market Highlights

US Treasuries gave back their post-US CPI gains following slightly hawkish US macro data, including a 10k drop in US initial jobless claims and a higher-than-expected increase in import prices (+0.9%mom vs. 0.4% prior and 0.3% expected). The leading index fell 0.6%mom vs. 0.3% prior and expected, driven by weaker new orders and consumer expectations, but this did not drive yields lower. Several months of “good” inflation prints or “bad” activity data are likely needed for the Fed to consider a rate cut.

FOMC governor Bowman expects inflation will stay high for a while, but it eventually should decline amid high interest rates. She noted that current monetary policy stance is restrictive, but reiterated her willingness to raise rates should inflation progress stall or reverse. She also noted that progress towards a better balance in the labour market has slowed, which could keep core services inflation persistently high. This was despite a lower-than-expected nonfarm payroll number in Apil.

The DXY USD index fell 0.8% to 104.45 last week, as markets traded the theme of weaker US CPI data. Global sentiment also remains buoyant, with the Dow Jones Index closing above 40,000 for the first time.

Regional FX

Asian currencies have mostly gained against the US dollar over the past week, despite giving back some gains last Friday following a renewed pickup in US yields. KRW was the clear underperformer last Friday, with USDKRW rising 0.8% to 1,356, alongside around a 1% fall in KOSPI. USDTWD also rose 0.4% to 32.22. PHP weakened by 0.3% to 57.67 per US dollar following BSP governor’s comments that a rate cut is possible in August. IDR and THB also depreciated by 0.3% against the US dollar.

CNH fell only by a modest 0.1% to 7.2312 per US dollar last Friday, while China’s CSI300 index rose 1% to 3,678, buoyed by policy positives from China. The Chinese government has rolled out both supply- and demand-side property support measures last week. A major focus is to get local governments to buy houses at steep price discounts to clear a large stock of housing inventories, though the source of funding remains uncertain. Also, the minimum nationwide downpayment ratio is cut by 5pps to 15% for first home and 25% for second home. Later today, the PBOC will announce its 1y and 5y loan prime rates. With the PBOC keeping the 1y MLF rate unchanged at 2.50% last week, markets expect no changes to the key lending rates.

MYR held on to its gains at 4.6877 per US dollar, on the back of a faster-than-expected rise in its Q1 GDP growth to 4.2%yoy from 2.9% in Q4 2023. On a sequential basis, Malaysia’s economy was up 1.4%qoq, driven by private spending and a rebound in exports.