Instimatch - FX morning commentary - 17/1/25

Good morning

Scott Bessent – the US Treasury Secretary nominee – used his confirmation hearing to make the case that exchange rate moves and lower prices for Chinese goods will blunt the impact of tariffs on US consumers. He was critical of China in the hearing, saying that it is the most imbalanced economy in the history of the world, and that they are trying to export their way out of a recession as opposed to doing a much needed internal rebalance. He also added that he will push Beijing to resume agriculture purchases from the earlier Phase One trade agreement and even pursue a “make-up provision.”  Meanwhile, Fed Governor Christopher Waller suggested that the US central bank could lower interest rates again in during 2025 if inflation data continues to be favourable, and that if future inflation futures fall in line with December’s positive report, the Fed may cut rates more this year and sooner than investors are currently expecting.

Today is quiet on the data front, with market attention shifting to Trump's inauguration on Monday.  US markets are closed on Monday for Martin Luther King Day.  Main focus are the US data points, covering housing starts and building permits, as well as December industrial production.  In the Eurozone it is also quiet with only final CPI reading on the calendar.  However, we will get to hear from ECB officials on both ends of the spectrum, with Nagel as a hawk and Escriva and Centeno as dovish speakers scheduled for the day.

The USD index steadied in Asian trade at 109.14.

EUR/USD climbed to the 1.03 level. Yesterday's US data triggered a muted market response, with control group retail sales surprising to the upside at 0.7% m/m, despite a weaker headline figure. Initial jobless claims ticked higher to 217k (cons.: 210k), contributing to a modest decline in US yields, further supported by dovish comments from Fed's Waller, who has made a big shift since November towards the dovish camp.

EUR/GBP tracked higher yesterday driven by weaker than expected monthly UK GDP figures from November. The economy grew by a modest 0.1%m/m in November (cons: 0.2%, prior: -0.1%) with growth stemming from services and construction. This leaves the UK economy set to stagnate in Q4 last year, in line with the BoE's expectations from the latest monetary policy meeting. Risk sentiment and global long-end yields remain key to follow for the cross with plenty of event risk next week with Trumps inauguration Monday and UK labour market data on Tuesday. 

The Chinese data dump overnight showed some resilience in the economy.  Q4 GDP grew 5.4% above consensus forecast of 5%, as monthly activity improved following the raft of recent stimulus measures.  Annual GDP read 5%, in line with Beijing’s target. Other data also showed China’s industrial production grew more than expected in December, as did retail sales, amid some signs of improving consumer spending. 

USD/CNY has come to a halt around 7.33 as it has hit the upper ceiling in the daily +/- 2% trading band around the fixing. As PBOC continues to aim for currency stability and kept the fixing unchanged since early November just below 7.19, the cross is unlikely to move higher in the short term. Our expectation of a short-term reversal in the overall USD development will also help to ease some of the pressure on USD/CNY. Eventually, we expect PBOC to allow for a higher fixing when expected tariff increases materialize. This should push the cross higher. But for now it is anchored with 7.3319 as the upper limit.

Asian FX markets had a subdued session despite hopes that China’s economy was picking up. The AUD/USD pair firmed slightly to trade back above $0.6200, while USD/KRW and USD/SGD were both trading with a slightly weaker bias at 1,457.46 and 1.3672. 

The IDR has underperformed this week as USD/IDR rose to 16,360 levels, following this week’s surprise decision by Bank Indonesia to cut its key interest rate by 25bp to 5.75%, in an effort to boost the country’s slowing economy.