Asia FX Talk - Powell said no rush to ease

Ahead Today

G3: US retail sales, export import prices, industrial production; Japan industrial production, tertiary industry index; CPI data from France and Italy

Asia: China activity indicators, final Q3 GDP data for Malaysia and HK

Market Highlights

Fed Chair Powell said there is no rush to cut rates with the economy still strong. It’s too early to determine the net effect of Trump’s tariff and fiscal policy. And that there is time to carefully assess the impact before reacting. And while the labour market has been moderating, it is still resilient. Indeed, initial jobless claims stayed historically low at around 217k vs. 221k in the prior week.  We think conditions for sharp dollar weakness are not present for now, although after the recent rally some consolidation or pullback could be healthy. The broad US dollar index (DXY) tested the resistance zone at around the 107.00-level before pulling back to the 106.70-level. There could be some near-term consolidation for the US dollar, given it’s in overbought territory and traders have pared back some of their bullishness on the US dollar for now.

Meanwhile, US core PPI (ex-food and energy) rose to 0.3%mom in October vs. 0.2%mom in September and higher than market expectation for a 0.2%mom rise. From a year ago, PPI rose 3.1% from 2.8% in September. This, along with sticky core CPI, suggests core PCE inflation for October could remain sticky at 0.3%mom or 2.8%yoy. This could lead to a more gradual pace of Fed rate cuts in 2025. Moreover, cost pressures could rise from potential US import tariff hikes. Services PPI (+0.3%mom vs. 0.2% in September) has driven up producer prices more than goods PPI (+0.1%mom following declines in prior 2 months).

Regional FX

We remain negative on the outlook for Asian FX through H1 2025, given the potential negative economic impact of likely US tariff hikes on regional growth and amid heightened global trade uncertainties. THB and MYR led losses in the region, declining 1.2% and 0.9% on Thursday, respectively. The PBOC has also gradually set a higher daily USDCNY fixing rate but keeping it below the 7.20-level for now to manage depreciation expectation. USDCNY has moved into the upper range of its policy band. Still, offshore yuan spread with CNY has widened to more than 1000 pips, reflecting weak foreign investor sentiment towards the outlook for China’s economy. However, a potential modest pickup in China’s activity data for October, to be released today, may help provide a bit of a support for CNY. China’s retail sales could receive a holiday related boost, while industrial production and fixed asset investment may have inched higher.