Week Ahead FX outlook:
Key FX views:
The week ahead is expected to be somewhat quieter, after a bonanza of central bank meetings including Kevin Warsh’s first as Fed Chair, the US-Iran deal, coupled with lower oil prices resulted in significant market volatility.
The focus next week will be on US PCE inflation, while in Asia we will have China’s loan prime rate decision, the Bank of Thailand monetary policy meeting, Singapore’s CPI inflation, and MSCI’s market review of Indonesia. The consensus for core PCE is centered around a 0.32% mom rise, following datapoints and inputs from the CPI and PPI inflation prints. The Bank of Japan will release its Summary of Opinions from its latest policy meeting and markets will watch to see any divergence of views within Board members on the path of BOJ rates ahead.
We expect the BOT and PBOC to keep rates on hold, with the Bank of Thailand likely to continue signaling policy rates remaining low for some time to come. Meanwhile, Singapore’s headline inflation is expected to tick up to 2%yoy from 1.8%, but this in and of itself is unlikely to prod the MAS to tighten exchange rate policy further given declines in oil prices that we have already seen.
Overall the past week has been driven by multiple themes, the sum of which have driven the Dollar stronger, risk sentiment higher, and within the Asia FX complex some recovery in the oil-importers such as INR and PHP and softer tone from the likes of MYR and KRW. Certainly the sharp declines in oil prices, with the announcement of the US-Iran deal and expectations around the reopening of the Strait of Hormuz have helped some of the Asian currencies that have underperformed most. What’s also important to note however is Kevin Warsh’s first meeting as Fed Chair, which could signal a meaningful regime change in the Fed moving forward. Among other things, he has started delivering on his long-stated desire to provide less forward guidance, and the five taskforces he is setting up including on communications and the Fed’s balance sheet could provide justification for big changes at the Fed in time to come. Overall, markets took the comments and focus on price stability by the Fed from a hawkish perspective, and moving forward, markets may need to start to price in more volatility given a less certain reaction function from the Fed.
The Dollar strengthened and Asian currencies were mixed with higher US rates offsetting lower oil prices
