IC Markets Asia Fundamental Forecast | 1 February 2024
What happened in the US session?
ADP non-farm employment for the month of January printed at 107k, missing market expectations for a gain of 148k jobs. The hiring slowdown of 2023 has spilled into January while wage pressures continue to ease. Nela Richardson, chief economist for ADP, made the following comments: “Progress on inflation has brightened the economic picture despite a slowdown in hiring and pay. Wages adjusted for inflation have improved over the past six months, and the economy looks like it’s headed toward a soft landing in the U.S. and globally”. The dollar index (DXY) dropped from 103.50 to 102.95 following the ADP release.
Meanwhile, the FOMC statement showed that “the committee does not expect it will be appropriate to cut until it has gained greater confidence that inflation is moving sustainably to 2%”, pushing back against market expectations of aggressive rate cuts in 2024. During his press conference, Chairman Jerome Powell also pushed back against aggressive cuts by stating that “inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain”. In addition, Chairman Powell mentioned that reducing policy restraint too soon or too much could reverse the progress on inflation and he is prepared to maintain the current policy rate for longer if needed.
January’s FOMC statement and press conference was a big reversal with respect to the tone and outlook for monetary policy action, causing the DXY to spike as high as 103.70 from a base of 103.05.
What does it mean for the Asia Session?
The Caixin Manufacturing PMI is set to be released this morning where manufacturing activity is expected to grow for the month of January, possibly marking the third consecutive month of expansion for this sector. Manufacturing activity has been mixed over the past 12 months and should the latest PMI reading print higher than the forecast, it could function as a bullish catalyst for crude oil prices.
The Dollar Index (DXY)
Key news events today
Unemployment Claims (1:30 pm GMT)
ISM Manufacturing PMI (3:00 pm GMT)
What can we expect from DXY today?
Unemployment claims have trended lower since mid-November but last week’s figures came in higher than expected. Should claims once again print higher than this week’s estimate of 213k, it could put downward pressure on the dollar.
Meanwhile, the ISM Manufacturing PMI has remained in contraction for 14 consecutive months, highlighting the prolonged weakness for this sector. The prices index of this report will also be closely watched – should both the headline PMI and prices index fall more than expected, it could function as a potential bearish catalyst for the greenback.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the fourth meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2.0% over the longer run.
- Recent indicators suggest that economic activity has been expanding at a solid pace.
- Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low.
- Inflation has eased over the past year but remains elevated.
- In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2.0%.
- 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 19 to 20 March 2024.
Next 24 Hours Bias
Weak Bullish
Gold (XAU)
Key news events today
Unemployment Claims (1:30 pm GMT)
ISM Manufacturing PMI (3:00 pm GMT)
What can we expect from Gold today?
Unemployment claims have trended lower since mid-November but last week’s figures came in higher than expected. Should claims once again print higher than this week’s estimate of 213k, it could put downward pressure on the dollar.
Meanwhile, the ISM Manufacturing PMI has remained in contraction for 14 consecutive months, highlighting the prolonged weakness for this sector. The prices index of this report will also be closely watched – should both the headline PMI and prices index fall more than expected, it could function as a potential bearish catalyst for the greenback. Gold prices could receive a much-needed boost during the US session if the data plays out as mentioned above.
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?
Following the release of the FOMC statement and the hawkish press conference by Federal Reserve Chairman Jerome Powell, the Aussie dived towards the threshold of 0.6550. However, this currency found support around this threshold to rebound higher at the beginning of the Asia session.
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 Bearish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
The Kiwi slumped against the dollar following the release of the FOMC statement and the hawkish press conference by Federal Reserve Chairman Jerome Powell, causing it to tumble towards the threshold of 0.6100. However, this currency found support around this threshold to bounce higher as Asian markets came online.
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?
Following the release of the FOMC statement and the hawkish press conference by Federal Reserve Chairman Jerome Powell, USD/JPY rebounded strongly to rise towards 147.50 but the bullish move was short-lived. Significant demand for the Japanese yen has kept this currency pair, as well as the other yen-crosses, under heavy selling pressure.
Central Bank Notes:
- The Bank will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control (YCC), aiming to achieve the price stability target of 2.0%, as long as it is necessary for maintaining that target in a sustainable and stable manner.
- The Bank of Japan decided on the following measures:
- YCC: 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.
- Inflation expectations are expected to rise moderately toward the end of the projection period, with continued improvement in the output gap and changes in firms’ wage- and price-setting behaviour and in labour-management wage negotiations.
- 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 March 2024.
Next 24 Hours Bias
Medium Bearish
The Euro (EUR)
Key news events today
CPI (10:00 am GMT)
What can we expect from EUR today?
Inflation in the Eurozone has eased quite significantly over the past six months and January’s flash estimates point to this trend extending further. Should inflationary pressures continue to dissipate in Europe, the Euro is all but certain to come under heavy selling pressure, especially after yesterday’s hawkish FOMC statement and press conference.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a third consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook.
- Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions.
- Tight 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 7 March 2024.
Next 24 Hours Bias
Medium Bearish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
The Swiss franc weakened against the dollar following the release of the FOMC statement and the hawkish press conference by Federal Reserve Chairman Jerome Powell, causing it to jump above 0.8640. This currency pair pulled back towards the end of the US session but proceeded to climb higher this morning.
Central Bank Notes:
- The SNB kept the policy rate unchanged at 1.75% for a second consecutive meeting in December.
- The inflation forecast puts average annual inflation at 2.1% for 2023, 1.9% for
2024 and 1.6% for 2025.
- GDP growth is likely to be weak in the coming quarters; subdued demand from abroad and the tighter financing conditions are having a dampening effect.
- Switzerland’s GDP is likely to grow by around 1% this year. For 2024, the SNB currently expects growth of between 0.5% and 1%.
- Next meeting is on 21 March 2024.
Next 24 Hours Bias
Weak Bullish
The Pound (GBP)
Key news events today
BoE Monetary Policy Report (12:00 pm GMT)
What can we expect from GBP today?
The Bank of England (BoE) announces its monetary policy report today where they are widely expected to keep the official bank rate on hold at 5.25%, marking the 4th consecutive pause on rates. If the BoE statement is perceived to be less hawkish than the Federal Reserve’s, especially after Fed Chairman Jerome Powell’s press conference, the Pound is all but certain to come under intense selling pressure.
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?
The Loonie weakened against the dollar following the release of the FOMC statement and the hawkish press conference by Federal Reserve Chairman Jerome Powell, causing USD/CAD to spike as high as 1.3445. This currency pair was retreating away from its overnight high as Asian markets came online, with higher crude oil prices keeping up the overhead pressures.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the fourth meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy has stalled since the middle of 2023 with real GDP forecasted to grow 0.8% in 2024 and 2.4% in 2025.
- The slowdown in demand is reducing price pressures in a broader number of CPI components, with CPI inflation expected to remain close to 3% in the first half of 2024 before gradually easing, returning to the target of 2% in 2025.
- The Governing Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation, and wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
- Next meeting is on 10 April 2024.
Next 24 Hours Bias
Weak Bearish
Oil
Key news events today
Caixin Manufacturing PMI (1:45 am GMT)
What can we expect from Oil today?
The Caixin Manufacturing PMI is set to be released this morning where manufacturing activity is expected to grow for the month of January, possibly marking the third consecutive month of expansion for this sector. Manufacturing activity has been mixed over the past 12 months and should the latest PMI reading print higher than the forecast, it could function as a bullish catalyst for crude oil prices.
Moving over to US inventory levels, the EIA inventories missed market expectations with a build of 1.2M barrels of crude versus a draw of 0.8M. Despite the surprise inventory build (which signals weaker demand in the US), crude prices remain elevated due to the ongoing tensions in the Middle East and the prospect of potential production cuts during the upcoming OPEC+ meeting on 1st February. WTI oil was trading around $76.30 per barrel at the beginning of the Asia session.
Next 24 Hours Bias
Weak Bullish
