Asia FX Talk - Better labour market balance

Ahead Today

G3: Europe Services PMI, Bank of Canada rate decision, S&P Services PMI, ISM Services Index

Asia: Philippines inflation, China Caixin Services PMI, Singapore retail sales

Market Highlights

US jobs openings moderated more than expected to 8.05 million, and as such continues to point to less tightness and better demand and supply in the US labour market. Quit rates, which has a good leading relationship with wage growth, remained at around 2.2%, which points to continued moderation in wage growth. Meanwhile, durable goods were a touch softer than expected at 0.6%mom. All of this leading to some modest repricing in Fed rate cuts, with roughly 1.8 cuts expected by year-end, compared with 1.65 previously.

US 10-year yields came off further to 4.33%, equity markets picked up slightly, while the Dollar was mixed. Markets will focus today on the ISM Services Index, to see if the recent weakness in US ISM Manufacturing is also reflected in the services numbers. The prices paid sub-component will also be important to see if leading indicators point to moderation in services inflation in the US. Meanwhile the Bank of Canada is expected to cut rates, and may be viewed by markets as a harbinger of what the Fed may do moving forward given the close economic relationship between the two economies.

Regional FX

Regional FX

Asian FX markets were somewhat stronger heading into the US session, with THB (+0.54%), IDR (+0.18%) and MYR (+0.16%) outperforming, while PHP underperformed (-0.36%). India’s 2024 General Election results were a massive surprise to markets and political observers, with the incumbent BJP losing its single-party majority in Parliament (see India 2024 Elections – A major shockwave – wait for the dust to settle). PM Modi and his BJP party will now only be able to form the government and return to power in coalition with allies from the National Democratic Alliance (NDA). What’s crucial is that there are some regional parties in the NDA alliance know to switch sides historically, and as such some power sharing is likely needed. While some things for India will not change and we remain positive on India’s macro more generally, three things will likely be different. 1) Much lower chance of passing difficult reforms. 2) Shifts to support consumption and lower income, 3) Unclear stability of coalition over the medium term. We think volatility in markets can continue in the near-term, and would wait for the dust to settle first before attempting to fade some of the weakness in INR FX and risk assets we are seeing right now and the medium-term positive macro picture dominates. We raise our USDINR forecast to 83.00 by year-end, and push out the expectation of the 1^st RBI rate cut to the Jan-Mar quarter.