Asia FX Talk: Stabilising US yields (25 Oct 2023)

Ahead Today

G3: Australia 3Q CPI, Germany IFO, US New Home Sales

Asia: Philippines Budget balance

Market Highlights

Overnight, EURUSD fell from its session highs of 1.069 down to 1.0595, as preliminary October Eurozone PMIs disappointed consensus expectations, highlighting continued softness in Europe’s economy. In particular, manufacturing PMI fell to 43.0 from 43.4, while services activity also rolled over to 47.8 from 48.7. Nonetheless, this was balanced by continued correction lower in US yields, with the 10-year declining to 4.83%, and comes despite US S&P PMIs coming in stronger than expected in October.

Risk assets generally did well, including a 0.7% rise in the S&P500 and a jump in Bitcoin, perhaps for 2 reasons. First, Brent oil prices fell to US$88/bbl, with Joe Biden and the Saudi crown prince agreeing to pursue efforts to prevent the Israel-Hamas war from escalating. Second, China stepped up economic support by raising its fiscal deficit ratio to 3.8% of GDP from 3% and raising issuance of central government debt, with President Xi Jinping also making his first known visit to the PBOC, underscoring the focus on stabilising the economy amidst structural challenges.

Australia released 3Q CPI estimates, which surprised on the upside at 5.4%yoy, with other measures of underlying inflation such as the trimmed mean and weighted median also stronger than expected. This could raise expectations for RBA to hike its cash rate further, on the back of Governor’s Bullock’s recent hawkish speech where she said the central bank will not hesitate to raise rates further if the inflation data shows a material rise in price pressures. AUDUSD bounced up by 0.42% on the back of the data.

Regional FX

Asian FX pairs were generally stronger to stable against the Dollar, on the back of the declines in US yields, together with greater optimism over stimulus support out of China. Thailand’s exports data was stronger than expected at 2.1%yoy (vs consensus of -1.75%yoy), mainly driven by rising demand for food and agriculture products together with a recovery in shipments to China, helped by products such as fruits, electronics and jewellery. Regional export data out of Taiwan, Vietnam, Korea and China have generally been better than expected, providing some signs of green shoots in the manufacturing sector in Asia.