Greenback weaker, euro stronger
Global markets remained broadly cautious overnight ahead of tonight’s key US inflation result.
The US dollar was lower, with the USD index down 0.1%, but markets are unlikely to take a substantial position ahead of tonight’s CPI number with participants broadly expecting the result to signal a continued slowdown in price pressures.
The euro was the best performer, with the EUR/USD up 0.3%, after a surprise rebound in French industrial production and Italian retail sales. The EUR was higher in most other markets.
The USD/CNH and USD/SGD were both flat while the NZD/USD fell 0.2%.
The Australian dollar was stronger despite a weaker than expected reading from local inflation.
The AUD/USD gained 0.2% as November annualised inflation fell from 4.9% to 4.3% making further Reserve bank of Australia rate hikes less likely.
Australian trade balance is due today.
US CPI due
Looking to tonight’s US CPI number, due at 12.30am AEDT, following a 0.3% increase in November, core CPI inflation is estimated to have stayed constant at 0.3% m-o-m in December. Monthly core CPI inflation is seen at 3.8%.
Used car prices probably resumed their decline following a brief break in November, whereas non-auto core goods prices, which fell substantially in November, likely recovered marginally in December. Rent and OER inflation are likely to have eased, but only little, indicating a sluggish process of rent disinflation. Lodging-away-from-home costs appeared to fall considerably among non-rent core service prices, while airline tickets increased sharply, countering the negative impact of decreased hotel prices.
As a result, “supercore” CPI inflation is expected to remain at 0.4%, following a 0.4% increase in November. Overall, the December CPI data will likely serve as a reminder that there is still work to be done to achieve persistent inflation of 2%. Headline CPI inflation is seen at 0.3% m-o-m in December, up from 0.1% in November, based on a trend-like increase in food prices of 0.2% and a flat reading for energy components.
The DXY Index remains under pressure since it is still below its 100-day exponential moving average. However, as highlighted recently, the US small business pricing intentions generally lead CPI and there may be a risk of higher US inflation print and therefore higher DXY index.
BoK policy meeting
The Bank of Korea looks likely to maintain its policy rate at 3.5%, which indicates declining inflation and mounting financial stress. Fears of a financial crisis have returned, as Taeyoung Construction Company has begun to restructure its debt, including project finance debt.
As a result, we anticipate the BOK to place greater emphasis on financial stability and market mood stabilization, resulting in a dovish hold in terms of the BOK’s dot plot and policy statement.
We rate a dovish hold at 80% and a hawkish hold at 20%, in which BOK Governor Rhee strongly opposes market expectations of rate cuts and reiterates that the BOK should focus on returning inflation to its 2% target for “a sufficiently long period of time.”
Finally, we believe it is premature to expect a dissent vote for rate cuts at the January meeting; rather, we anticipate a dissent vote in Q2 before the BOK begins rate cuts in July.
As market conditions improve, potential foreign asset allocation into Korea’s equities market can fuel KRW appreciation.
USD mostly weaker ahead of CPI
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 8 – 13 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.
