Ahead Today
G3: US retail sales, import prices, and initial jobless claims; euro area CPI
Asia: Australia and HK unemployment rates
Market Highlights
Policy uncertainty in the US has been a persistent theme this year. Apart from tariffs, recent developments surrounding the President Trump/ Fed Chair Powell saga has added to market unease. Reports suggest that President Trump drafted a letter to dismiss Powell and sought opinions from Republican leaders on making such a move. A White House official was also reportedly quoted saying that Trump could act soon to remove Powell. Markets reacted on the news, with equities, US dollar, and long term Treasuries all falling. Short-term yields also fell, possibly reflecting market speculation that a dovish Fed Chair replacement could cut interest rates quickly. However, markets have pared back losses after Trump backtracked and said that firing Powell is highly unlikely unless there was a cause. Notably, Trump had previously explored legal grounds for dismissing Powell over renovation works at the Fed’s headquarters, though the rationale appears tenuous.
Despite the speculation, a shift to rapid rate cuts may not be straightforward even if a dovish Fed Chair replacement comes on board. The FOMC committee, not the Chair alone, determines policy direction. Even if Powell chooses to resign, appointing a successor would take time, let alone to convince the committee to vote for a rate cut.
The potential dismissal of Fed Chair Powell, or even attempts to undermine the Fed’s independence, could lead to a more severe flare-up in markets than what we had observed yesterday. Such intentions by Trump have introduced a significant left tail risk that markets will monitor closely. In addition to pressuring Powell into rate cuts, Trump has also shifted pressure onto the Fed’s board of governor in a bid to sway future policy decisions towards easing.
Regional FX
President Trump’s recent reciprocal tariff announcements have stalled the appreciation momentum in Asian FX markets, with currencies such as the JPY, KRW, and TWD underperforming relative to other regional currencies since 4 July. Despite this recent weakness, most Asian currencies continue to hold on to their year-to-date gains, most notably TWD, which has appreciated by 11.5% against the US dollar. Market concerns over the risk of erosion of the Fed’s independence and broader policy credibility remain a key source of market uncertainty. These risks could continue to weigh on the US dollar in the near term.
Bank Indonesia (BI) cut its benchmark policy rate by 25bps to 5.25% at its 16 July policy meeting, following a dovish hold in June. The move is in line with our expectation, although market consensus had anticipated a pause. With BI appearing to become more dovish at the policy meeting, we now factor in one more 25bps rate cut in Q4, which would bring rates down to 5%. President Trump has announced a bilateral trade agreement with Indonesia, reducing the reciprocal tariff rate on Indonesia to 19%, down from the 32% stated in his initial tariff letter, though still above the 10% baseline rate implemented since April. Meanwhile, we expect the US-Indonesia trade deal to contain downside risks to the rupiah, as Indonesia’s economy is likely to slow less than previously anticipated under Trump’s earlier proposed 32% reciprocal tariff rate. The trade agreement could also help support market sentiment, supporting capital inflows into the government bond market.
