Ahead Today
G3: US trade balance, wholesale inventories, initial jobless claims, leading index
Asia: BSP and BI policy rate decisions, Malaysia CPI
Market Highlights
The broad US dollar index (DXY) rose 0.6%, supported by stronger than expected US macro data and a seemingly hawkish set of January FOMC minutes. Durable goods orders excluding transportation rose 0.9%mom, while non-defense capital goods orders excluding aircraft rose 0.6%mom, with both prints exceeding Bloomberg consensus expectations. Manufacturing output and overall industrial production also surprised to the upside.
In addition, the policy signal from the Fed minutes appeared hawkish despite the presence of dissent, anchoring near term US dollar sentiment. While two Fed officials dissented in favour of cutting rates, the overwhelming majority supported holding rates steady in January. Most officials judged that downside risks to employment have eased, while concerns over persistent inflation remain. Several policymakers also cautioned against further policy easing, warning that rate cuts could signal a weakening commitment to achieving the Fed’s 2% inflation objective.
That said, market expectations for 2 Fed rate cuts later this year remain intact, particularly following the moderation in headline CPI inflation to 2.4%yoy in January from 2.7%yoy in December. This could help cap further upside in the US dollar.
Regional FX
Liquidity in Asian markets may be thinner than usual today, with China and Hong Kong markets closed for the Lunar New Year holiday. Against the backdrop of a seemingly hawkish set of Fed minutes, Asian currencies could remain on the defensive.
In the Philippines, the BSP is likely to cut rates by 25bp to 4.25% amid a slowing domestic economy. GDP growth decelerated further to just 3.0%yoy in Q4, down from 3.9%yoy in Q3. At the same time, inflation remains well contained and the peso has strengthened, partly supported by strong demand for local government bonds. That said, policy easing would still narrow the interest rate differential with the US in the near term, leaving the PHP vulnerable to external shocks.
In contrast, we expect Bank Indonesia to keep its policy rate unchanged at 4.75%, as price stability has become the immediate priority amid recent rupiah weakness and rising inflation pressures. Headline CPI inflation rose to 3.55%yoy in January, breaching BI’s 1.5%-3.5% target range, with risks skewed to the upside as the output gap continues to narrow. As a result, any further rate cuts are likely to be cautious and carefully timed, balancing the need to support credit growth against the risk of exacerbating pressures on the rupiah.