Fed officials caution on interest rates
The ongoing back-and-forth in FX markets continued overnight as a key US Federal Reserve official tried to push back on elevated expectations for six Fed rate cuts in 2024.
Fed governor Christopher Waller – seen as closely aligned to Fed chair Jerome Powell – said that while official interest rates were likely near a peak, markets should not expect a sharp drop in the Fed funds rate.
Waller said: “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.”
US shares were mostly lower on the comments with the Dow Jones down 0.6%. US bond yields were higher with the ten-year bond yield up from 3.95% to 4.06% overnight.
The AUD/USD fell 1.1%, NZD/USD dropped 1.0%, USD/SGD gained 0.7% while USD/CNH climbed 0.5%.
Despite the ongoing uncertainty around the Fed’s next move, FX volatility remains mostly lower over the last two months, and notably lower versus a two-year range.
NAHB housing could drive USD further gains
The US dollar’s strength pushed the currency to five-week highs with the US dollar index up 0.7% overnight – the biggest one-day rally in over 10 months (source: Bloomberg).
Tonight, the NAHB home builders’ confidence index looks likely to rise from 37 in December to 40 in January. The desire for new homes seems to be increasing.
Both mortgage rates and the number of applications for mortgages for purchases increased throughout the month. Furthermore, for the first time since July, there was a rise in the number of possible purchasers in December.
Again, the risk is that better data from the US housing markets might pour further cold water on rate-cut hopes – and push the US dollar further higher.
Indonesia BI rate decision due
The Bank Indonesia (BI) looks likely to maintain its policy rate at 6% on January 17. Even if inflation continues to drop, BI will probably stress that maintaining FX stability is its top objective and may even imply that it is not in a rush to lower its policy rate.
Additionally, we anticipate that the goods trade surplus will decrease from USD2.4 billion in November to USD1.3 billion in December. This is because export growth was probably quite negative, coming in at -7.9% year over year due to lower commodity prices and weaker external demand, especially from China. On the other hand, import growth most likely improved as a result of government initiatives to control domestic food prices by boosting import volume.
The USD/IDR recently climbed to one-month highs. The IDR’s comparatively good trade balance in 2023, despite a decline in commodity prices, may be ascribed to its resistance against the rise of the dollar. The value of exports has begun to rise as a result of extended prohibitions on the export of minerals and ongoing downstreaming initiatives, and these gains are expected to last for many years.
Aussie, kiwi at lows as Fed’s Waller cools cut hops
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 15 – 20 January
All times AEDT
Have a question? [email protected]
*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.
