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Differing convictions in monetary policies
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IANS | 24 Feb, 2023
Minutes from the Feb RBI monetary policy committee (MPC) review
reflected concern over inflation, owing to uncertain geopolitics,
volatile crude prices, and weather-related events. Outside of food,
inflation was seen at the risk of hardening further, requiring
policymakers to take calibrated action. The two dissenting members see
the need to pause and allow the lagged impact of policy actions to play
out, citing emerging growth risks. A majority of the MPC is likely to
vote for a 25bp hike in April with an unchanged stance, due to an
elevated Jan inflation outturn, sticky core, and a likelihood that
February inflation (out in mid-March) might also stay close to 6.3-6.5
per cent, before turning data dependent on the path ahead.
Overnight
US Fed minutes also reaffirmed their tough stance on inflation,
increasing the likelihood of a higher terminal rate. A hawkish RBI MPC
stance will help counter the impact of any resultant jump in the US
yields/ US dollar. That said, the policy preference is to keep the
currency at competitive levels vs regionals.
The RBI mopped up
net $3.8 billion in December 2022, after $4.4 billion in November 2022,
which partly explains the INR's underperformance in late-2022 even as
regional FX appreciated on a sliding US dollar. Concurrently, the
outstanding forwards book has also risen to $10.96 billion from $0.2
billion in October, as intervention was conducted in spot as well as
forwards and authorities remain keen to rebuild FX reserves. As a
result, the INR REER slipped below 100 in January 2023, addressing
valuation concerns vs key trading partners. In the near-term, with
strong US data driving DXY higher, the RBI will seek to contain
one-sided weakness in the rupee and keep intraday volatility in check.
Indonesia Rates: BI Governor to return for a second term
Indonesia's
President has nominated the incumbent Bank Indonesia (BI) Governor
Perry Warjiyo for a second term, after his current term ends in May.
This decision bodes well for policy stability and continuity, as
Governor Warjiyo enjoys the confidence of domestic as well as
international markets. While possible on legal grounds, this decision
breaks from norm as most past governors have usually served one term.
The
ruling party's majority in the parliament will pave the way for the
nomination to go through smoothly. Current Finance Minister Indrawati
Mulyani was rumoured to be as one of the potential contenders for this
position, besides BI's Senior Deputy Governor, among others. For now,
the benchmark rate is likely to be left on hold in March, with any
unexpected bouts of volatility in the rupiah likely to be met by
intervention efforts. A sharp realignment in the Fed's terminal rate
expectations might, nonetheless, bring precautionary hikes back in view.
( is Senior Economist at DBS Group Research)
Asia Rates: BOK unlikely to match Fed on 2023 hikes; Low 10 IndoGB yields By Duncan Tan
Against
rising short and long-term US rates, the front-end of Asia curves would
be better anchored by Asia central banks' expected earlier end to hike
cycles (relative to US). Long-term Asia rates would however follow
rising US to a larger extent (higher beta). Therefore, we think low-beta
rates markets like Singapore and Korea could steepen relative to US,
because of a more anchored front-end.
IDR Rates 10Y IndoGB
yields have been very well-anchored despite much higher 10Y UST yields
and flattening in the pace of foreign bond inflows, largely because of
the strength of domestic bond demand. With BI using monetary operations
and sale of short-term bonds to push the front-end curve higher, so as
to improve transmission and act as a buffer against increased Fed
uncertainty, the risks are that domestic demand for long duration bonds
could wane and 10Y IndoGB yields would eventually need to reprice higher
to maintain its attractiveness relative to front-end rates.
KRW Rates BOK
kept its policy rate unchanged at 3.50 per cent. The growth outlook
remains weak, but increased Fed uncertainty and recent pickup in
inflation (Jan print) would preclude BOK from pivoting dovish. 1Y to 5Y
KRW IRS rates have bounced 15-35bps in February, largely a one-to-one
beta move to higher US rates. We think that ultimately, Korea's weak
growth outlook would mean that BOK is unlikely to match the Fed on rate
hikes in the coming months. Therefore, the recent retracement higher in
KRW IRS would be a fade, either via receive outright or more preferably,
against pay US rates (relative-value).
(Duncan Tan is Rates Strategist at DBS Group Research)
FX Daily: Fed has a more straightforward rate path than the ECB and BOE By Philip Wee
Momentum
is building for the DXY to extend its rise from 104 to 106. DXY
appreciated 0.4 per cent to 104.5, its highest level since January 5.
After the FOMC minutes, the market sees the Fed delivering 25 bps hikes
at the following three FOMC meetings, bringing the Fed Funds Rate to
5.25-5.5 per cent by June. The new peak is in line with New York Fed
President John Williams' projected 5-5.5 per cent range by the end of
this year.
Williams said on Thursday that the prices might not
fall as quickly as expected from solid demand in the US economy,
persistent price pressures in the services sector, and ongoing supply
chain issues. St Louis Fed President James Bullard wants the FFR higher
at 5.375 per cent as soon as possible. Bullard and Cleveland Fed
President Loretta Mester favoured a 50 bps hike to 5-5.25 per cent at
the FOMC meeting on March 22. The market believes the Fed will lift this
year's FFR target from the 5.1 per cent pencilled last December.
Hence,
the data-dependent market will be vulnerable if today's US initial
jobless claims fail again to rise to 200k for the February 18 week. Last
week, claims fell to 194k for the February 11 week instead of rising to
200k from 195k (revised from 194k). However, it will be the Fed's
favourite inflation gauge, the PCE deflator, tomorrow that will cement
expectations for US rates to be higher for longer this year. Bloomberg
consensus expects headline inflation to strengthen to 0.5 per cent MoM
in January from 0.1 per cent in December and core inflation to 0.4 per
cent from 0.3 per cent, in line with last week's CPI numbers.
GBP
depreciated 0.5 per cent to 1.0246, back around Monday's close. Last
week, UK CPI core inflation fell sharply to 5.8 per cent YoY in January;
consensus had expected a decline to 6.2 per cent from 6.3 per cent in
December. The outcome aligned with the Bank of England's assessment for
inflation to fall rapidly this year. BOE Chief Economist Huw Pill warned
of "overtightening" risks amidst signs of loosening in the labour
market. Let's see if his hawkish colleague, Catherine Mann, also hints
at slowing the pace of rate hikes to 25 bps at the Monetary Policy
Committee meeting on March 23.
The BOE lifted the bank rate
twice by 50 bps in December and February to 4 per cent. GBP/USD has been
consolidating between 1.19 and 1.2450 since December. In the short
term, it is wedged between 1.1930 (100-day moving average) and 1.2130
(20d MA).
EUR depreciated by 0.4 per cent to 1.06, back to levels
in the first week of 2023. The European Central Bank may be on a
collision path with markets on its rate hike path. ECB Governing Council
Member Francois Villeroy De Galhau said that monetary policy was
already restrictive, with rates at 2.5 per cent. At the last meeting on
February 2, the ECB hiked the main refi rate and the deposit facility
rate by 50 bps each to 3 per cent and 2.5 per cent, respectively.
The
swap market is betting on the deposit rate rising to 3.75 per cent by
September, more robust than the Bloomberg consensus for the refi rate to
peak at 3.75 per cent in 2Q23. Villeroy warned that the ECB was not
obliged to hike at every meeting to September. Between now and
September, there are four ECB meetings. ECB member Pablo Hernandez de
Cos will speak in parliament on Thursday.
(Philip Wee is Senior FX Strategist at DBS Group Research)
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
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66.20
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64.50 |
UK Pound
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87.50
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84.65 |
Euro
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78.25
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75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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