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EM Asian currencies likely to weaken further amid increasing risk aversion, says Scotiabank

The emerging market Asian currencies are expected to weaken further amid increasing risk aversion and remain susceptible to developments in the US-China trade negotiations during the remainder of the year, according to the latest research report from Scotiabank.

The Fed released the minutes of the October 29-30 FOMC meeting on Wednesday, signaling a pause to monetary easing. We reckon the US central bank has shifted to a "wait-and-see" stance, as "most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well calibrated to support the outlook of moderate growth, a strong labor market" and stable inflation.

In addition, "all participants judged that negative interest rates currently did not appear to be an attractive monetary policy. tool in the United States." In the meanwhile, we believe there is a high bar for future Fed rate hikes amid ongoing trade-related uncertainties that could spur safe-haven demand for the dollar abruptly.

The US central bank could turn dovish once again going forward. After all, Fed Funds Futures are now pricing in a near 100 percent chance of one more 25bp rate cut by September 2020. Consumer spending accounts for more than two-thirds of the US economy, remaining the main engine of American economic growth this year, the report added.

The latest data showed that Americans spent more on shopping in October while pulling back on nonessential items, suggesting US consumers’ solid but increasingly cautious willingness to consume.

The October FOMC minutes emphasized that "In particular, some further signs of a global slowdown in economic growth emerged; weakening in the global economy could further restrain the domestic economy, and the risk that the weakness in domestic business spending, manufacturing, and exports could give rise to slower hiring and weigh on household spending remained prominent."

The US House of Representatives just passed the Senate-version pro-Hong Kong rights bill that requires regular reviews of the city’s special financial status. It will impose pressure on President Donald Trump and complicate the ongoing US-China trade talks, while reaching an interim trade deal is in the interest of the Trump administration and China.

If President Trump chooses no action (more likely) or vetoes (unlikely, unless China makes more concessions in the trade talks) the bill, it will enhance market confidence in the two nations’ intention to reach a phase-1 trade deal although the bill could still become a law according the US legislation procedure.

If President Trump signs the bill into law immediately (less likely), it will certainly spur risk aversion and boost flight-to-quality demand across the markets, at least temporarily, Scotiabank further noted in the report.

By Debarati Bir
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