IC Markets Asia Fundamental Forecast | 15 December 2023
What happened in the US session?
As widely expected, the Swiss National Bank (SNB), Bank of England (BoE) and the European Central Bank (ECB) all kept their respective policy rates on hold at 1.75%, 5.25% and 4.50% respectively. In general, all three central banks are expecting global economic growth to slow and while inflation has eased, price pressures remain at a domestic and international level. Out of all four central banks making their monetary policy announcements this week, the Federal Reserve was the most dovish of them all with the dollar index (DXY) dropping to a low of 101.80 overnight.
What does it mean for the Asia Session?
Japan’s flash Composite PM for the month of December returned to expansion after contracting for the first time in November as the private sector experienced a mild increase in overall business activity. As observed throughout 2023, the upturn was supported by a stronger rise from the services sector while inflationary pressures also saw a renewed uptick.
The Japanese yen has seen increased inflow since mid-November causing the USD/JPY to drop under 141.00 in recent days. Downward pressures remain for this currency pair but it could edge higher today as traders may close out their short positions to fuel a relief rally on the final trading day of the week.
The Dollar Index (DXY)
Key news events today
Composite PMI (2:45 pm GMT)
What can we expect from DXY today?
The Composite PMI has expanded over the past ten months in the US and the flash reading for December points to a relatively unchanged figure from the previous month’s print of 50.7. New orders – which signal future demand – returned to growth in November so we can expect the private sector to remain in expansion, albeit at a marginal rate. A stronger-than-expected PMI 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
Gold (XAU)
Key news events today
Composite PMI (2:45 pm GMT)
What can we expect from Gold today?
The Composite PMI has expanded over the past ten months in the US and the flash reading for December points to a relatively unchanged figure from the previous month’s print of 50.7. New orders – which signal future demand – returned to growth in November so we can expect the private sector to remain in expansion, albeit at a marginal rate. A stronger-than-expected PMI reading could trigger renewed demand for the US dollar and potentially create downward pressures on gold prices during the US session.
Next 24 Hours Bias
Weak Bearish
The Australian Dollar (AUD)
Key news events today
Composite PMI (10:00 pm GMT 14th December)
What can we expect from AUD today?
The flash readings Australia’s Composite PMI increased marginally to 47.4 from 46.2 for the month of December but it has remained in contraction territory over the past three months as both domestic and external economic conditions remain subdued. A tenth consecutive monthly reduction in new export business was also observed which highlights the weak global demand, especially from China. The Aussie hit a high of 0.6728 yesterday and is making a second attempt to surpass this level 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
No major news events.
What can we expect from NZD today?
The Kiwi hit a high of 0.6250 yesterday but is currently running out of steam as markets enter the last trading day of the week. It was trading around 0.6200 as Asian markets came online and is expected to drift lower 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 Bearish
The Japanese Yen (JPY)
Key news events today
Composite PMI (12:30 am GMT)
What can we expect from JPY today?
Japan’s flash Composite PM for the month of December returned to expansion after contracting for the first time in November as the private sector experienced a mild increase in overall business activity. As observed throughout 2023, the upturn was supported by a stronger rise from the services sector while inflationary pressures also saw a renewed uptick.
The Japanese yen has seen increased inflow since mid-November causing the USD/JPY to drop under 141.00 in recent days. Downward pressures remain for this currency pair but it could edge higher today as traders may close out their short positions to fuel a relief rally on the final trading day of the week.
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
Medium Bullish
The Euro (EUR)
Key news events today
Composite PMI (9:00 am GMT)
What can we expect from EUR today?
The ECB kept their main refinancing rate on hold at 4.50%, marking a second consecutive pause which was followed by ECB President Christine Lagarde’s press conference. President Lagarde was somewhat hawkish as she stated that future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary to return inflation to the ECB’s 2.0% goal in a timely manner.
Meanwhile, the flash readings for the Composite PMI will be released today which should show some marginal improvement in the Eurozone’s manufacturing and services sectors for the month of December. However, this Composite PMI has been contracting over the past six months and this flash reading is likely to show another month of contraction. A weaker-than-expected print is likely to add downward pressure 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 Bearish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
The Swiss National Bank’s (SNB) kept its policy rate on hold at 1.75% for a second consecutive meeting as inflationary pressures have decreased slightly over the past quarter. Inflation stood at 1.4% in November and was somewhat lower than in the previous months – this slight decrease was above all attributable to lower inflation on goods and tourism services.
However, inflation is likely to increase again somewhat in the coming months due to higher electricity prices and rents, as well as the rise in VAT. The Swiss franc has seen strong inflows since mid-November causing USD/CHF to remain under pressure.
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 Bearish
The Pound (GBP)
Key news events today
Composite PMI (9:30 am GMT)
What can we expect from GBP today?
The Bank of England (BoE) kept its official bank rate unchanged at 5.25%, voted by a majority of 6-to-3, for the third meeting in a row. In the Monetary Policy Committee’s (MPC) November Monetary Policy Report projections, conditioned on a market-implied path for Bank Rate that remained around 5¼% until 2024 Q3 and then declined gradually to 4¼% by the end of 2026, GDP was expected to be broadly flat in the first half of the forecast period, in part reflecting relatively weak potential supply, and an increasing degree of economic slack was expected to emerge from the start of next year.
Meanwhile, the flash readings for the Composite PMI will be released today which should show some marginal improvement in the United Kingdom’s manufacturing and services sectors for the month of December. This Composite PMI reading moved into expansion in November following three months of decline – a stronger-than-expected print could provide a lift for the Pound.
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
BoC Gov Macklem Speaks (5:25 pm GMT)
What can we expect from CAD today?
Bank of Canada (BoC) Governor Tiff Macklem’s end-of-year speech is due to be released at 5:25 pm GMT at the Canadian Club of Toronto and he will deliver the full speech at 5:40 pm GMT where questions from the audience are expected. His remarks are bound to have an impact on the direction of the Canadian dollar and thus create volatility for USD/CAD.
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
Strong Bearish
Oil
Key news events today
China Industrial Production (2:00 am GMT)
What can we expect from Oil today?
Industrial production in China has picked up steadily since the middle of this year and November’s forecast of 5.7% YoY points to the biggest rise since April. Higher production figures out of China could potentially signal higher demand for crude oil in the manufacturing sector and thus provide a bullish catalyst for oil prices. WTI oil climbed above $72.50 per barrel overnight and was trading around $72.10 as Asian markets came online.
Next 24 Hours Bias
Medium Bullish
