Asia FX Talk - Powell offers no olive branch for Asian currencies

Ahead Today

G3: US: FOMC meeting minutes, ADP employment change, jobless claims, factory orders, ISM services index; services PMI for several key euro area economies

Asia: China Caixin services PMI

Market Highlights

There are several key takeaways from Fed Chair Powell’s speech at the ECB forum yesterday. Powell has adopted a balanced tone on the monetary policy outlook. On one hand, he has acknowledged that US disinflation has resumed, the labour market has come into better balance, while a year from now inflation should moderate to 2%-2.5% and unemployment could possibly stay at 4%. On the other hand, the Fed would still like to see several more inflation data before considering rate cuts. He has added that a largely resilient (albeit gradually cooling) US economy and labour market are allowing the Fed to stay patient for the time being. He has not provided any specifics on the timing and pace of rate cuts, nor did he signal for a September rate cut. The key US data highlights for today are the ADP employment change and ISM services index. The ADP number is likely to reflect a broad moderating trend, while services activity is likely to have continued to expand, helping to keep the US economy resilient

Meanwhile, the euro area CPI eased to 2.5%yoy in June from 2.6%yoy in May. But core inflation was sticky at 2.9%yoy. ECB president Christine Lagarde has said sticky services inflation needs close monitoring while adding that more data is needed to be convinced that inflation threats have passed. There’s also no specific guidance on the future path of ECB rates, following its June rate cut.   

Regional FX

With the Fed staying patient and may not be doing anything on the policy rate for now, the US dollar could continue to remain firm. This could put Asian currencies under continued depreciatory pressure, constraining the room for regional central banks to lower interest rates. Ongoing weakness in the yen is likely to favor positioning for further weakness in Asian currencies. Moreover, the French election is not done yet, with a run-off to be held on 7 July, while a US presidential election is due in November. In particular, we think there’s still some downside in high-yielding Asian currencies like the Indonesian rupiah. Moreover, the rupiah faces its own political transition risk in October, where incoming President Prabowo will be inaugurated. Bank Indonesia’s proactive support for the rupiah could help at the margins.