Asia FX Talk - Sticky US inflation

Ahead Today

G3: US PPI, jobless claims, Fed Chair Powell speech; eurozone GDP

Asia: Thailand consumer confidence, India trade

Market Highlights

US headline and core inflation maintained the same pace from September, rising 0.2%mom and 0.3%mom in October, respectively. This was in line with market expectations. And from a year ago, headline CPI rose 2.6% vs. 2.4% in September, partly due to fading base effects, while the core gauge (ex- food and energy prices) remained sticky at 3.3%. Energy prices were flat in October, while food prices were subdued and did not contribute much to headline inflation. But core goods disinflation stalled, with prices of used cars rising 2.7%mom, the most over a year, due to seasonal factors. Elsewhere, disinflation in other goods categories have continued. Meanwhile, core services inflation remained at 0.4%mom, while owner equivalent rent – a subset of services - was also up by 0.4%mom. There’s nothing much in the October CPI report to halt the Fed’s rate-cutting cycle. We still look for a 25bps US rate cut in December. Moreover, the three-month and six-month core PCE inflation are at around 2.3%yoy, suggesting significant progress has been made on inflation.

One complication is that of Donald Trump returning to the White House, as his proposed economic policies (tariffs + running a larger fiscal deficit) could have an inflationary bend. The Fed is still set to lower policy rates, just that the pace could be slower. This will help support the US dollar (testing its 1-year high), at a time when other major central banks are easing policy amid rising domestic growth concerns.

Regional FX

Asian FX has remained at weak levels against the US dollar as market sentiment stays poor and there’s a lack of new fiscal stimulus form China. MYR (-0.2%) led losses in the region on Wednesday, though other Asian currencies have gotten some reprieve. The PBOC has set a stronger daily fixing rate to help slow the pace of depreciation in CNY, with China-linked currencies such as the KRW and THB also gaining by 0.5% and 0.4%, respectively, on Wednesday. We think Asian FX weakness still has legs, with tariff hikes likely to be in the pipeline. Notably, the Republicans have a clean sweep of Congress, giving Donald Trump a strong mandate to enact his policies. Trump has been building his cabinet by leaning on allies and China skeptics to fill key appointments. So, we expect a more aggressive economic stance by the Trump administration against China. Given the negative economic impact from tariffs, Asian central banks may have to cut rates to support growth. This would be an additional factor to stay negative on the outlook for Asian FX.