Ahead Today
G3: US PCE Price, US Personal Consumption, US New Home Sales, US U of Mich Sentiment
Asia: India PMI
Market Highlights
Markets remained cautious while oil rose to US$71/bbl, as the US military deployed aircraft carriers, fighter jets and refueling tankers in the Middle East, with Trump reportedly weighing an initial limited strike within days to force Iran to make a nuclear deal according to the WSJ.
Meanwhile in Asia, BSP cut rates by 25bps while BI remained on hold. We think both Asian central banks are the more dovish ones in the region and are not done with rate cuts and see BSP cutting rates once more and BI twice.
In particular, President Trump told reporters that he thought 10 to 15 days was “pretty much the maximum” he would allow for negotiations to continue with Iran. The military build-up and deployment thus far is unlike anything the US has done since 2003, and dwarfs the military buildup that Trump ordered off the coast of Venezuela in the weeks before he ousted President Nicolas Maduro.
In Asia, our analysis shows that the likes of PHP, INR, KRW, and THB tend to be more sensitive to spikes in oil prices, all things equal (Asia – The impact of oil price shock on Asia FX). Nonetheless, our general thinking is that with this year being the US mid-term elections, sustained military intervention by Trump and with that meaningful increases in oil prices is still unlikely. With the fundamentals for the oil market still pointing to a meaningful oversupply of 3-4mb/d according to the IEA, we think it would make sense to over time fade moves in Asia currency weakness in the likes of FX pairs we like such as KRW, TWD, CNY, and MYR.
Beyond oil prices, the Philippines and Indonesian central bank retained a somewhat dovish bias, but with higher domestic rice prices being a constraint for BSP and the weaker Indonesian Rupiah the key constraint for BI on further rate cuts over the near-term.
The BSP raised its inflation forecasts to 3.6% and 3.2% for 2026 and 2027 in the Feb 2026 meeting, from 3.2% and 3.0% previously, reflecting supply-side factors including higher domestic rice prices amidst changes in rice import policies. While the higher inflation trajectory seemed to be a near-term constraint to further rate cuts, the BSP Governor said that given most of the drivers are supply-side related, it is possible to look through it assuming that inflation expectations do not become unanchored moving forward.
During the press conference, there was also a lot of focus on the impact of confidence on the Philippines economy, and how weaker than expected confidence had resulted in much slower growth than the BSP had anticipated. We felt the explanations in the press conference was slightly confusing (and more importantly backward looking), but nonetheless the more important message is that the BSP expects growth to improve moving forward as confidence and government spending recovers.
Our base case assumption is that there should be some recovery in government spending for the Philippines, but full normalization will likely only come in 2027 looking at historical episodes of corruption issues in the Philippines.
As such, we think that the BSP will likely cut rates one more time in 2026, but timing wise BSP could opt to take a pause first before cutting in the following meeting. From an FX perspective, we are as such also biased to see USD/PHP climb gradually over time, with the output gap still negative and interest rates still biased to move lower.