Ahead Today
G3: US Sep PPI, US Sep Retail sales
Asia: Thailand Trade, Taiwan Industrial Production
Market Highlights
Markets saw risk-on sentiment with increased pricing of a December Fed rate cut, coupled with continued signs of US-China détente in a call between President Xi and Trump. In particular, San Francisco Fed President Mary Daly said she supports lowering interest rates in December, citing downside risks to the labour market while also saying that an inflation pickup is a lower risk given how tariff-driven cost increases have been more muted than anticipated. Historically Daly’s views typically align quite well with those of Fed Chair Powell, at least publicly. Meanwhile, Fed Governor Waller reiterated his view for a December cut, with the latest data suggesting that the labour market remains weak, although he advocated a more meeting by meeting approach from January given new information and data that will come from then. The Fed Funds futures market are now pricing for a 77% chance of a December cut, from 63% before these comments, and now this has provided some support for risk assets coupled with some marginal softening in the Dollar.
Meanwhile, President Trump and President Xi held their first talks since agreeing to a truce last month, with Trump saying that the relationship between US and China is extremely strong with significant progress on both sides in keeping to their agreements. According to the White House, both leaders spoke about Russia and Ukraine and Xi expressed hope for the two sides to reach a binding peace agreement. The tone was also positive from the Chinese readout, with President Xi telling Trump that US and China should maintain momentum in ties and expand cooperation.
Across Asia, we saw some signs of pushback against currency weakness by central banks, with RBI likely entering the market yesterday after allowing USD/INR to rise above the 89 levels, while South Korean authorities convened a meeting to discuss measures on the FX market. In particular, RBI Governor Sanjay Malhotra said that the rupee’s recent weakness is a natural outcome of India’s inflation gap with other economies, with a 3-3.5% annual drop typical for the currency. He noted that the RBI’s focus is on containing excessive volatility rather than defending any specific level. Meanwhile, he also mentioned that there is scope and policy space to cut rates in the RBI December meeting given low inflation.
In South Korea, the internal trigger level for the National Pension Service to conduct FX selling and hedging is not officially known, but at various times this has been noted to be a significant deviation of USD/KRW from its long-term average over more than 20 years. With the base level of hedging at 5% of foreign currency assets, and a ceiling rate of up to 10% of assets if the trigger is breached, this could imply perhaps US$25bn of hedging needs which may provide some support to the KRW moving forward.
