Asia - Forex Fundamental Forecast | 18 December 2023
What happened in the US session?
The flash Composite PMI for the month of December showed business activity growth ticking up from 50.7 to 51.0 in the US. This was the eleventh consecutive month of expansion which marked a 5-month high as activity rose at the fastest pace supported by the sharpest increase in new orders since July.
Meanwhile, cost pressures gained momentum as input prices increased at the quickest pace since September. Although higher costs continue to be passed on to customers by firms, the overall pace of inflation slowed from the previous month. The dollar index (DXY) hit a low of 101.77 last Thursday before edging higher to close out the week at 102.59.
What does it mean for the Asia Session?
Last Friday, the US dollar experienced its largest weekly fall in four weeks shedding 1.7% while Treasury bond yields dived over 7.4% to mark the second largest decline of 2023. Should incoming inflation data in the US point to continued moderation, further declines for these two securities are certain to persist.
Although downward pressures remain strong, the DXY could retrace higher in the initial part of the day before resuming the downturn, especially after comments by New York Fed President John Williams. In an interview with CNBC last Friday, he stated that “it’s too early for officials to begin thinking about lowering borrowing costs”, causing the dollar as well as short-dated Treasury yields to rise.
The Dollar Index (DXY)
Key news events today
NAHB Housing Market Index (3:00 pm GMT)
What can we expect from DXY today?
The National Association of Home Builders (NAHB) will release its figures for December where the Housing Market Index is anticipated to edge up from 34 to 36, reversing four months of consecutive declines. Elevated mortgage rates, buoyed by high interest rates, are pricing many home buyers out of the market causing significant headwinds for the housing market. A stronger-than-expected reading could trigger renewed demand for the US dollar and provide a relief rally for the DXY during the US session.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the third meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2.0% over the longer run.
- The Committee will continue to assess additional information and its implications for monetary policy.
- In determining the extent of any additional policy firming that may be appropriate to return inflation to 2.0% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
- In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
- Next meeting runs from 30 to 31 January 2024.
Next 24 Hours Bias
Weak Bullish
The Euro (EUR)
Key news events today
German ifo Business Climate Index (9:00 am GMT)
What can we expect from EUR today?
The German ifo Business Climate Index appears to have ‘bottomed’ in the third quarter of 2023 as the index ticked higher in October and November. The forecast for December indicates an extension of this uptrend, albeit at a slower rate. The ifo Index is expected to print at 87.6, up from November’s figure of 87.3. A stronger-than-expected number could function as a bullish catalyst for the Euro.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a second consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.
- Underlying inflation has eased further but domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.
- The past interest rate increases continue to be transmitted forcefully to the economy as tighter financing conditions are dampening demand, and this is helping to push down inflation.
- The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
- Next meeting is on 25 January 2024.
Next 24 Hours Bias
Weak Bullish
The Pound (GBP)
Key news events today
No major news events.
What can we expect from GBP today?
The Pound came within a whisker of breaking above the 1.2800-level last Thursday but it sold off hard on Friday to slide under 1.2700. This pullback could be attributed to traders locking in profits on their long positions after making a sharp rise following the FOMC meeting. Should the Pound manage to climb above 1.2700, it is likely to remain elevated today.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6-to-3 to maintain its Official Bank Rate at 5.25%.
- Three members preferred to increase the Bank Rate by 0.25 percentage points to 5.5%.
- CPI inflation remains well above the 2% target, with twelve-month CPI inflation falling sharply from 6.7% in September to 4.6% in October while services price inflation declined to 6.6%.
- The decline in CPI inflation over recent months could largely be attributed to falls in energy, food, and core goods price inflation, as external cost pressures had continued to abate. Services price inflation had remained elevated, however.
- The mean projection for CPI inflation is 2.2% and 1.9% at the two- and three-year horizons respectively.
- Next meeting is on 1 February 2024.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
No major news events.
What can we expect from CAD today?
With demand for the US dollar waning significantly in recent weeks, USD/CAD tumbled under 1.3400 losing nearly 200 pips or 1.5% in the process. Should the dollar sell-off gain traction once more, this currency pair could slide under 1.3350 today. However, a relief rally could be expected today after last week’s extensive sell-off.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the third meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following a growth of 1.4% in the second quarter.
- The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices, leading to the easing of CPI inflation to 3.1% YoY in October.
- The Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed and would also like to see further and sustained easing in core inflation.
- Next meeting is on 24 January 2024.
Next 24 Hours Bias
Weak Bullish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
The Aussie breached the key 0.6700-threshold to hit a high of 0.6728 last week, a level last seen at the end of July. With markets concluding that the Federal Reserve has put an end to its hiking cycle, the strong sell-off in the US dollar caused the Aussie to surge from Wednesday onwards – this currency is expected to remain elevated today.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the fifth pause out of the last six board meetings.
- Inflation in Australia has passed its peak but is still too high and the progress in bringing inflation back to the target range of 2% to 3% was looking slower than earlier forecast.
- Any further tightening of monetary policy to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.
- Next meeting is on 6 February 2024.
Next 24 Hours Bias
Weak Bullish
The Kiwi Dollar (NZD)
Key news events today
Trade Balance (9:45 pm GMT)
What can we expect from NZD today?
New Zealand’s trade deficit shrank to $1.7B in October from $2.4B in the previous month as exports to China, the EU and Japan all fell. Exports tumbled 9.3%, led by a decline in outbound shipment of milk powder, butter and cheese. New Zealand’s trade balance has been in a deficit over the past five months and the latest estimate shows this trend is set to continue. However, the Kiwi could remain elevated for most parts of today.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the fourth meeting in a row.
- The Committee is confident that the current level of the OCR is restricting demand. However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation.
- If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.
- The Committee agreed that interest rates will need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment.
- Next meeting is on 28 February 2024.
Next 24 Hours Bias
Weak Bullish
The Japanese Yen (JPY)
Key news events today
No major news events.
What can we expect from JPY today?
The Japanese yen witnessed increased inflows last week as USD/JPY dived nearly 2.0% to hit a low of 141.00. This currency pair has managed to stay above this threshold for now but should it give way, a drop under 140.00 should come as no surprise – USD/JPY could retrace higher in the first half of the day before eventually resuming the downturn.
Central Bank Notes:
- The Bank will continue with QQE with Yield Curve Control, aiming to achieve the price stability target of 2.0%, as long as it is necessary for maintaining that target in a stable manner.
- The Bank of Japan decided on the following measures:
- Yield curve control: Negative interest rate of -0.1% on policy-rate balances and purchase of Japanese government bonds to keep 10-year JGB yields at around 0% while regarding the upper bound of 1.0% for 10-year JGB yields as a reference in its market operations.
- Medium- to long-term inflation expectations have risen moderately. Even as actual inflation decelerates, inflation expectations are expected to rise moderately toward the end of the projection period, with the output gap turning positive and changes in firms’ wage- and price-setting behaviour and in labour-management wage negotiations. This will likely lead to a sustained rise in prices accompanied by wage increases.
- Japan’s economy is likely to continue recovering moderately for the time being, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies.
- Next meeting is on 19 December 2023.
Next 24 Hours Bias
Weak Bullish