Asia FX Talk - US core PCE inflation in focus

Ahead Today

G3: US: personal income and spending, core PCE, University of Michigan sentiment, first round of presidential debate; inflation data from France, Spain, Italy

Asia: Thailand trade data and international reserves

Market Highlights

The key data highlight for today is the US core PCE deflator – the Fed’s preferred price gauge. Receding price pressures in the CPI and PPI data in May suggest core PCE inflation will likely soften. Market consensus is for core PCE to slow to +0.1%mom vs. +0.2%mom in April. This implies 2.6%yoy in May, a slowdown from +2.8%yoy in April.

However, unless core PCE inflation is much slower than expected, we think the short-term US dollar uptrend will remain intact. Moreover, sentiment towards the US dollar has become more positive, global funds have stayed net long on the US dollar, while the French election poses downside risk to the euro. Signs of economic weakness in yesterday’s US macro data releases have also not dented the US dollar. US durable goods orders grew 0.1%mom in May, easing from a downwardly revised 0.2%mom (+0.6% before the revision). Non-defense capital goods ex-aircraft fell 0.6%mom in May, from +0.3% prior, while core shipments of capital goods fell 0.5%mom from +0.4% prior. Initial jobless claims of 233k were relatively in line with market expectations of 235k, but recurring claims were higher at 1839k in the week ending 15 June, compared to 1828k prior. US Q1 GDP growth was also revised up to 1.4%qoq annualized vs. +1.3% in the second estimate, but still slowing from +3.4% in Q4 2023. PCE inflation was also revised higher to 3.7%qoq vs the second estimate of +3.6%qoq.

Regional FX

The Thai baht has been one of the worst performing currencies in Asia so far this year, falling about 8% against the US dollar. While a firm US dollar and domestic politics serve as near term headwinds for the currency, we retain our sanguine outlook for the Thai baht in the later part of this year. This will be driven by a pickup in fiscal impulse, a better outlook for total exports, and lower US interest rates (and BOT to hold rates) this year. Thailand’s trade data for May will be released later today. With factory activity expanding again in May for the first time since mid-2023, we look for a further improvement in Thailand’s yoy goods exports growth over the coming months. This, along with a recovery in tourism, should help support Thailand’s current account balance, containing near-term THB weakness. Sentiment has also become less bearish in Thailand’s equity and bond markets.