Written by Steven Dooley and Shier Lee Lim
Aussie higher after Chinese rate cut
Regional FX markets were mostly higher on Tuesday helped by a larger than expected interest rate cut from the People’s Bank of China.
While the one-year rate was held steady at 3.45%, the five-year rate was cut by a larger than expected 25 basis points from 4.20% to 3.95%. The market had been looking for a 10-basis point cut.
The move was the first reduction in China’s benchmark loan prime rate since June last year.
FX markets around the region were higher with the kiwi leading the gains. The NZD/USD climbed 0.3%.
The AUD/USD gained 0.2% and reached three-week highs ahead of today’s key wage price index release due at 11.30am AEDT.
The USD was weaker in Asia with the USD/SGD and USD/CNY both down 0.1%.
Fed minutes due
Prior to notable positive shocks in the January jobs report and CPI, the FOMC meeting was held in January. As a result, the conversation in these minutes on the possible timing of rate decreases is probably outdated. We still anticipate learning more about the FOMC’s wider perspectives on disinflation and proactive rate reductions.
Specifically, Federal Reserve chair Jerome Powell downplayed the dangers associated with greater economic momentum and the unequal progress on disinflation across goods and services in his press conference, which featured a number of dovish remarks on the inflation forecast. Subsequently, a number of Fed members retreated, highlighting the dangers of sticky supercore inflation.
We’ll also be watching to see if representatives discuss the possibility of a higher neutral rate and how that uncertainty would affect a future round of rate-cutting.
The synchronization of the global easing cycle will ensure that the dollar’s yield advantage endures even in the event of Fed rate cuts.
Indonesia policy decision in focus
Given the continued increased external risks and the deterioration of the goods trade balance, which might jeopardize Bank Indonesia’s primary policy goal of preserving FX stability, we anticipate that Band Indonesia will hold its policy rate at 6%.
There may be balance of payment challenges if FDI inflows continue to drop at a time when the current account is once again in deficit, partially because of the uncertainty around a potential change in administration following the elections. This is why BI must be on guard.
We also anticipate that the policy statement’s tone will stay the same and that it won’t become less hawkish despite inflation staying steady within BI’s 1.5–3.5% objective, in line with the Fed’s higher-for-longer narrative.
With commodity prices falling to pre-Covid levels, the external picture is becoming worse. We are bearish on IDR.
PBOC cut boosts Asian FX
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 19 – 23 February
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.
