Asia FX Talk - Powell’s delicate balancing act

Ahead Today

G3: US: mortgage application, wholesale inventories 

Asia: Philippines trade, China CPI and PPI, policy rate decision from RBNZ

Market Highlights

The Fed sees a two-way risk for its restrictive monetary policy stance. In his semi-annual monetary policy testimony to Congress, Fed Chair Powell has acknowledged that disinflation has resumed at a modest pace following a lack of progress early this year. But he has warned that cutting rates too early or by too much could risk reigniting a pickup in price pressures. More “good” inflation data showing a return to the 2% target is needed for a policy pivot. Powell has also said that a lesson learnt from the high inflation period in the 70s is that policymakers need to stick to their task of fighting inflation until it is beaten. Yet, policymakers are also concerned that cutting interest rates too little or too late could weigh on growth and employment. That weakness has not developed yet, according to Powell, with the labour market only becoming more balanced and conditions returning to where they were before the Covid pandemic, i.e. “strong but not overheated”.

Overall, we think the next Fed policy move is still a rate cut and not a rate hike, and the Fed will remain patient for now. Notably, US core services inflation has been sticky at 5.3%yoy in the first 5 months, albeit moderating over the past year. Core inflation could still be sticky in the months ahead, though, while upside risks could stem from higher trade tariffs, with odds of Donald Trump returning to the White House rising, and ongoing geopolitical tensions in the Middle East. Given a low FX volatility environment, the US dollar continues to look relatively attractive.

Regional FX

Asian FX performance were mixed this week amid a modest recovery in the US dollar. USDCNH was stable at around the 7.2900 level, and so is the USDMYR at around the 4.7000 level. The yen resumed its decline (-0.4%), while KRW, TWD, and SGD also fell by about 0.2%. In contrast, THB (+0.5%), IDR (+0.2%), and PHP (+0.1%) made further gains against the US dollar. China’s CPI, which is due later today, will likely remain subdued, reflecting a weak and bumpy recovery in domestic demand. With the Fed staying patient, coupled with a lack of credit impulse in China, recent modest CNH strength could be contained.  

Meanwhile, Thai baht’s outperformance this week could have been due to investor optimism about fiscal stimulus, which will contribute to an improving outlook for growth. Thai PM Srettha will hold a briefing on the government’s THB500bn cash handouts (THB10,000 each for about 50mn citizen aged 16 years and older) on 24 July, with tentative plans to kick start the disbursement in Q4. Along with an expected return of peak tourism season in Q4 and signs of a pickup in local sentiment, we stay sanguine on the THB heading into Q4.