Asia FX Talk - BoJ, BSP, CBC rate decisions loom following Fed’s hawkish rate cut

Ahead Today

G3: US 3rd estimate for Q3 GDP, initial jobless claims, leading index, existing home sales; BoJ policy decision

Asia: Policy rate decisions from BSP and Taiwan’s central bank

Market Highlights

The Federal Reserve reduced interest rates by 25bps to 4.25%-4.50%, as we had expected. But it was a hawkish cut, supporting US dollar strength and pushing US yields higher. Fed Chair Powell has said that the Fed can be cautious with easing, is still on track to lower rates, but more inflation progress is needed for additional rate cuts. There's also uncertainty regarding Trump’s fiscal and trade policies, which could add to inflation pressures. Meanwhile, Powell has sounded confident that inflation will continue to decline. As for the Fed’s dot plot, a lack of further disinflation progress has led to the median dot showing just 2 rate cuts in 2025, which would bring the benchmark policy rate to 3.75%-4.00% by end-2025.

Market consensus is now leaning towards no BoJ rate hike today. With USDJPY around the 155.00-level, rather than rising much higher, there’s reduced urgency for a December rate hike. Still, the BoJ remains on track for rate normalization, though the timing of the next rate hike could be in January. Governor Ueda might hint at a January rate hike during his press conference.

Regional FX

Asian currencies weakened against the US dollar in Wednesday’s session, driven by sustained US dollar strength and elevated long-term US treasury yields. Key highlights for the Asia region today are the policy rate decisions from BSP and Taiwan’s CBC. We expect BSP to lower its policy rate by 25bps to 5.75%, with Philippine inflation remaining on target and growth momentum slowing. This could further weigh on the Philippine peso, which could move beyond the 59.00-level against the US dollar. Meanwhile, Taiwan’s central bank will likely stand pat at 2.00%.

Elsewhere, a couple of key central bank meetings took place yesterday. Bank Indonesia held its policy rate at 6.00% to support the rupiah, against our expectation for a 25bps rate cut. In our view, this will be at the expense of growth. Indeed, we’re already seeing signs of softening growth momentum. Clearly, BI remains focused on stabilising the rupiah, which has weakened above 16,000 against the US dollar. Currency weakness has partly been due to a recent raid at BI’s offices, adding to negative market sentiment. However, with economic growth softening and the inflation outlook remaining manageable, we think the rate-hold decision represents a pause rather than an end to BI’s easing cycle. We still look for a total of 75bps rate cuts in 2025, possibly in H2. We also keep our outlook for USDIDR to rise to 16,250 by Q1 2025 on potential US tariff announcement.

The Bank of Thailand (BoT) also kept its policy rate unchanged at 2.25% yesterday, in line with our outlook and defying government pressures for further easing. With economic growth and inflation likely to rise in 2025, we think BoT will hold rates until H2 2025, when lower fed funds rate allows it to cut rates by another 25bps. There’s no change to our USDTHB forecast at 34.70 by end-2024 and 36.10 in Q1 2025 on potential higher US tariffs.