FX Daily: Softer USD ahead of FOMC
The DXY eased towards 102 overnight as markets digested a softer US employment cost index outturn. With employment cost inflation moderating to 1% (q/q) in Q4, the Fed should be comfortable to downshift to a 25bps rate hike in the FOMC meeting tonight, in line with expectations. Meanwhile, the Euro Area looks to have averted a recession, with Q4 GDP coming in at 0.1% (q/q sa) yesterday. While this was a better than expected read, it still marks the weakest sequential growth since Q1 2021, with both Germany and Italy registering a q/q contraction individually.
USD/CNY continues to hover around 6.75.China’s manufacturing and non-manufacturing PMIs improved sharply in Jan to 50.1 (Dec:47.0) and 54.4 (Dec:41.6), as China’s reopening lifted sentiment and supported activity. The IMF’s latest GDP forecasts also showed a large upward revision for China’s 2023 growth to 5.2% (Oct: 4.4%). Despite such positivity, the CSI 300 index declined by 1% yesterday, with markets having priced in a reopening boost already. The US reportedly getting both Japan and Netherlands to restrict advanced semiconductor equipment exports to China may also have weighed, raising geopolitical risks a tad. Foreign equity inflows may become a smaller driver for the RMB going forward, setting the stage for more two-way price action.
USD/JPY has softened and even broke below 130 briefly amid a modest decline in the US 10y yield to 3.50%. Looking ahead, the JPY may see renewed volatility with the Japanese government set to announce its choice for the next BOJ Governor this month. The new Governor’s outlook will be closely scrutinized, given intense speculation on whether there could be more tweaks to yield curve control. Deputy Governor Amamiya and former Deputy Governor Nakaso are seen as the top contenders, with Nakaso possibly viewed to be less dovish.
Korea’s Jan exports came in worse than expected, tumbling by 16.6% (y/y) amid a cyclical downturn in the semiconductor sector. This contributed to a monthly trade deficit of USD12.7bn, which is the worst on record for Korea. The KRW has rallied strongly since November amid optimism over China’s reopening, but USD/KRW could now hold above 1220 if Korea’s large trade deficit persists.
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