Asia FX Talk - Fed cut rates, focus on China stimulus

Ahead Today

G3: US University of Michigan Sentiment

Asia: China National People’s Congress Standing Committee Meeting, Taiwan Exports

Market Highlights

The Fed cut rates by 25bps as expected while communicating a neutral tone for the future path for rate cuts in a couple of ways. First, Chair Powell said that the US Election results will have no effects on the Fed’s policy decision in the near-term, as they don’t yet know the timing or substance of any fiscal policy changes. He said that the Fed “does not guess, does not speculate, and does not assume”, and that eventually any policy effects would be included when clearer. Second, Chair Powell highlighted progress in bringing inflation lower with the labour market normalising. Third, the tone of the policy statement was balanced with some removal in references to further progress to inflation. Last but not least, Chair Powell said that he will not step down if asked by President Trump, and there is no legal way for him to be removed as Fed Chair as well.

Overall, we some reversal in popular “Trump trades” in the FX and rates space – with the Dollar weakening overnight while 10-year US yields also coming lower to 4.33%. Nonetheless, the broader risk sentiment continued to be strong, with the market continued to focus on the reflation aspect of Trump for now. In particular the S&P500 was in reaching distance of the 6000 levels, while onshore China A shares also surged.

Regional FX

With the Dollar weakening overnight, Asian currencies also started did well with USDCNH falling to 7.1549, and KRW (+1%), SGD (+0.9%) and MYR (+0.3%) outperforming. Beyond broader Dollar weakness, what’s helping may also be some rise in expectations for stimulus out of China with the conclusion of the National People’s Congress (NPC) Standing Committee meeting later today, where we could get a statement on details of fiscal stimulus. News reports leading up today’s NPCSC meeting suggest a headline number closer to RMB10 trillion in reported stimulus. Nonetheless, what’s more important than the headline number will be the details in assessing the possible economic impact to China, given that the bulk of the stimulus will likely be allocated towards relieving of local government debt risks. The news reports suggest something along the range of at least RMB1 trillion in direct fiscal stimulus to boost consumption, and also an annual flow of RMB2 trillion for other uses such as resolving local government debt risks and recapitalization of banks. Any upside relative to some of these reported numbers and especially in the context of Trump winning the US Elections could be important for market sentiment moving forward.