Ahead Today
G3: US Initial Jobless Claims, Bank of England policy
Asia: Taiwan monetary policy
Market Highlights
The Federal Reserve cut the Fed funds rate by 25bps as expected bringing the Fed Funds mid-rate to 4.125% from 4.375% previously. The key takeaway from the meeting including from the press conference by Chair Powell was that this was a slightly hawkish leaning policy decision, in the broader context of a rates market which have already priced quite a lot of rate cuts for 2026. This is notwithstanding a dissent for a 50bps cut by new Fed Governor Stephen Miran and him also likely pencilling 150bps cuts for 2025 in the dot plot. The hawkish takeaway was for a couple of reasons. First, Chair Powell viewed the weaker job numbers as also reflecting lower labour supply from immigration, and as such not primarily about demand in his view. Second, Chair Powell also viewed the rate cut as a risk management move and as such not necessarily reflecting a clear start of a series of rate cuts. Third, the dot plots from the FOMC meeting added just one additional 25bps rate cut for both 2025 and 2026 which likely disappointed markets to some extent.
Overall, the US dollar initially sold off while US Treasury yields initially fell, before reversing the moves on the back of a somewhat hawkish takeaway from the FOMC meeting. While in the very near-term this will also weigh on Asian currencies, we continue to forecast the Dollar to weaken moving forward and as such think selling the Dollar on rallies and buying some (not all) Asian FX on weakness make sense.
Beyond the global developments, the key event in Asia was the surprise 25bps rate cut by Bank Indonesia yesterday, which only 2 out of 38 economists surveyed had expected. This brings the BI policy rate to 4.75% from 5.00% previously. In addition, BI also widening the interest rate corridor, and in particular lowered the bottom of the corridor from 4.25% to 3.75% - a 50bps reduction. Whether this will translate to effective interest rates moving to that extent as suggested by the corridor will depend on many things, including liquidity conditions and also capital flows, but the key point is that the potential is there and policy direction has signalled as such. The post meeting press conference saw BI Governor Perry characterizing BI’s monetary policy as “all-out pro growth, while maintaining stability”, and said that the central bank would be “prudent and measured” in its monetary policy. Overall, the flow through to FX and IDR will depend on also how investors perceive the extent of rate cuts, and also importantly whether the policy direction both from the central bank and the government is consistent collectively with macro stability and policy credibility