Ahead Today
G3: US Q3 GDP third estimates, initial jobless claims, Nov core PCE index
Asia: BNM policy rate decision
Market Highlights
President Trump’s softer tone on Greenland at Davos marks an important shift from the more confrontational rhetoric that had weighed on market sentiment earlier in the week. Trump said that he would not pursue military means to take control of Greenland. He subsequently commented that the US has established a framework for a future deal on Greenland and will withdraw tariffs scheduled for 1 February on European countries opposing US plans on taking over Greenland. Markets likely interpreted Trump's comments as a near-term de-escalation in US-EU tensions, prompting firmer US equities and a steady USD.
In Japan, long-end JGB yields have paused after their earlier surge that reflects markets' persistent concerns over the fiscal trajectory ahead of Prime Minister Takaichi’s snap election. Her proposal to suspend the 8% consumption tax on food and non-alcoholic beverages for two years has heightened market worries about larger deficit financing. Finance Minister Katayama sought to calm markets by reaffirming Japan’s commitment to fiscal discipline while signalling that FX intervention remains a policy option to manage yen volatility. Even so, the yen is likely to stay under downward pressure amid election uncertainty and a steeper JGB curve, with potential negative spillovers to the region - evidenced by recent KRW weakness that prompted Korean authorities to deliver verbal intervention.
Regional FX
Asian FX saw diverging performances versus the US dollar since the start of the year, with high-yielding currencies such as INR, IDR, and PHP underperforming alongside the KRW, which continues to be weighed down by weak growth, net equity outflows, and negative spillovers from yen weakness.
In Indonesia, the central bank left its policy rate unchanged at 4.75%, in line with our and market expectations. Rupiah stabilization is the immediate priority for Bank Indonesia. BI communicated a strong commitment to FX stability, signalling that it has boosted rupiah stabilization efforts, including FX intervention, while seeing the rupiah stabilising with a tendency to strengthen. BI’s rate hold and recent messaging will likely help slow the pace of rupiah depreciation and temper volatility, but this may not decisively reverse the currency’s weakness amid heightened market concerns about Indonesia’s fiscal trajectory and perceptions of BI’s independence.
A key highlight today is the BNM policy rate decision. We expect BNM to stay on hold at 2.75%, maintaining a broadly neutral policy stance, supported by favourable growth-inflation dynamics. Inflation rose to 1.6%yoy in December, from 1.4%yoy in November, but remaining relatively contained. The December trade surplus also widened to MYR19.3bn from MYR6.1bn in November, reinforcing our positive outlook for the ringgit amid CNY strength.