USD stronger as BoJ holds steady; NZD leads losses
The US dollar was mostly stronger yesterday after the Bank of Japan maintained its negative interest rate policy and pushed back expectations for an end of this policy to April at the earliest.
The USD/JPY ended 0.2% higher after a volatile session.
The move mostly boosted the greenback with the USD index up 0.2% as the currency hit a six-week high.
Across markets, the New Zealand dollar initially led the losses, with the NZD/USD falling to two-month lows before later recovering.
Today, NZ inflation will be the key early result – at 8.45am AEDT – with the number potentially setting up NZD sentiment for the first part of the year.
Annual headline inflation is forecast to fall from 5.6% to 4.7% — still some distance from the Reserve Bank of New Zealand’s 1-3% target. However, a higher-than-expected number could spark a NZD rebound.
US PMI provides first major update of the year
Today’s all-important purchasing manager indexes will be the first major economic releases of the year. PMIs are due in Australia, Japan, Europe and the US.
In terms of the US, the S&P manufacturing PMIs look likely to stay in contractionary territory. Easing financial circumstances have not yet affected polls.
We anticipate that PMI will continue to improve in some components, however. Recently, the employment subcomponent has continued to be favorable. Risks, however, remain on the downside, with employment growth slowing, some tech industry layoffs, and the ISM services employment subcomponent hitting its lowest level since July 2020.
Ultimately, for the greenback, data development will pose two-way risks to the FX market even if certain Fed officials have made little progress in tempering the overall dovish stance.
Furthermore, in the event that growth starts to halt more noticeably — especially when compared to higher beta currencies — risk aversion may temporarily boost the USD.
Other expected worries about the US elections, commodity prices, and the world economy also remain supportive for the time being.
MYR turns positive
Since the economic and inflation outlooks have mostly stayed consistent with Bank Negara Malaysia’s (BNM) assessment at the previous policy meeting in November, when it expressed a more neutral posture, we anticipate BNM to maintain its policy rate at 3.0%. when it hands down its policy decision today.
Although GDP growth has been falling short of BNM’s projected growth of “roughly 4%” for 2023, BNM will continue to maintain its view that monetary policy will be supportive of the economy at the present policy rate as long as there is evidence of a tech upcycle and a recovery into 2024.
Due to stable food prices, headline inflation in December will likely stay stable at 1.5% year over year. Core inflation, on the other hand, is likely to have decreased to 1.9% from 2.0% due to weak demand.
Nonetheless, we believe that the government is still committed to carrying out subsidy reduction measures, which we believe will cause inflation to gradually increase in H2 2024 and force the BNM to maintain stable policy settings for the duration of the year.
We are more positive on MYR thanks to current account developments and interest rate differentials, with the USD/MYR potentially finding resistance at all-time highs.
Kiwi in focus ahead of CPI
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 22 – 27 January
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer
