Written by Steven Dooley, Head of Market Insights, and Shier Lee Lim, Lead FX and Macro Strategist
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Global markets cautious ahead of Fed
Global markets turned cautious on Tuesday ahead of tonight’s all-important US Federal Reserve decision.
US shares fell. The Dow Jones was down 0.8% with S&P 500 and Nadsaq both down 0.6%.
Financial markets see a rate cut tonight as almost certain with a 95% probability of a 25bps cut to a new range between 4.25% and 4.50%. However, the focus is whether the Fed now signals a “pause” with tonight’s potential move resulting in 100bps of cuts since September.
As such, even with a Fed cut, the downside for the USD might be limited, and this was seen with the US dollar continuing to climb overnight.
The AUD/USD fell 0.6% as it traded to new one-year lows ahead of the Fed decision.
The kiwi was also weaker, down 0.5% and at new two-year lows.
The USD/SGD was steady near five-month highs while USD/CNH slipped 0.1% as major resistance at 7.3000 continues to cap gains.
JPY gains ahead of Thursday’s BoJ
Away from the Fed, the Bank of Japan and Bank of England decisions on Thursday are the other big announcements this week.
The BoJ decision remains uncertain. From the standpoint of fundamentals, such as the economy and prices meeting projections and the establishment of a positive wage-price cycle, the BOJ should raise its policy rate during its December Monetary Policy Meeting (MPM).
However, we believe that if the BOJ chooses to focus more on uncertainties, such as US policy behaviour and market developments (particularly in the FX market) over the quieter Christmas season, it may also choose to delay a rate hike.
Financial markets currently see a 20% chance of a hike on Thursday (source: Bloomberg).
The JPY was stronger higher on Wednesday with the AUD/JPY and NZD/JPY both falling from one-month highs. The JPY also jumped from one-month lows in Singapore and Hong Kong.
IDR at four-month lows
The policy meeting of the Bank of Indonesia is scheduled for today.
After a two-month pause, we anticipate that Bank Indonesia (BI) will lower its policy rate by 25 basis points to 5.75%.
BI probably anticipates that the Fed will make another decrease in December. BI will probably have room to start easing if the Fed makes another reduction, particularly if domestic demand is muted and inflation stays below its target level.
Given the possibility that president-elect Trump would put tariff policies into effect immediately after his inauguration in January, which might increase the volatility of the world’s financial markets, we believe BI may also be opportunistic and front load the decrease.
As BI maintains its advice that it envisions a possibly more restricted easing cycle, in line with its projection of fewer Fed cuts next year, we anticipate that the policy statement will have a tone that is mostly consistent with the previous meeting.
Technically, the path of least resistance for USD/IDR seems to be higher given it had broken 16,000 key resistance (as of the time of this writing) and 50-day EMA has crossed 200-day EMA from below. Next key resistance is 16,329.
USD stays stronger ahead of Fed
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 16 – 21 December
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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.
