EM Asian currencies likely to advance further on increasing optimism for US-China trade deal, says Scotiabank

The emerging market Asian currencies are expected to advance further on increasing optimism for reaching a partial US-China trade deal and a high bar for future Fed rate hikes, according to the latest research report from Scotiabank.

The Fed voted 8-2 to lower the target range for the fed funds rate by 25 bp to 1.50-1.75 percent, signalling it will refrain from further reductions unless the economy slows sharply. The US central bank also cut Interest Rate on Excess Reserves (IOER rate) and Overnight Reverse Repo (O/N RRP) rate by 25 bp each to 1.55 percent and 1.45 percent respectively for maintaining the interest rate target range, with effect from October 31.

The FOMC promised to monitor the implications of incoming information for the economic outlook "as it assesses the appropriate path of the target range for the federal funds rate," replacing its previous pledge to "act as appropriate to sustain the expansion" that was introduced at the June FOMC meeting.

Fed Chairman Jerome Powell said at the press conference after the conclusion of a two-day meeting that the US central bank needs to see a really significant move up in inflation that’s persistent before considering raising rates to address inflation, while seeing "the current stance of monetary policy as likely to remain appropriate as long as incoming information about the state of the economy remains broadly consistent with our outlook."

Fed Funds Futures are now pricing in a 75 percent chance of one more 25 bp rate cut by the end of 2020. The Fed’s pro-growth stance is needed to help weather the economic downturn and prop up US equities.

The US economy expanded at an annual rate of 1.9 percent in the July-September quarter, down slightly from 2.0 percent in the second quarter. Consumer spending accounts for more than two-thirds of the US economy, remaining the main engine of American economic growth.

Booming US stock markets could boost household consumption as there has been a shift in income to capital (ownership of businesses, land and assets) from labor (hourly wages and salaries) in the US, which is called the wealth effect, the report added.

On October 11, the Fed announced that it would buy Treasury bills (T-bills) beginning 15 October at an initial pace of USD60 billion a month and continue those purchases into the second quarter of 2020. The New York Fed bought USD7.501 billion of T-bills on October 16, the first operation under this renewed asset purchase programme.

"In our view, the Fed’s re-expansion of its balance sheet will weigh on the DXY Index in the months ahead. The Trump administration insisted that it would continue to press to finalize the "phase one" agreement in coming weeks, although Chile on Wednesday cancelled an upcoming summit where the two leaders planned to meet," Scotiabank further commented in the report.

China has reportedly offered an alternative and suggested the leaders of the two nations could meet in Macau, according to Fox Business' Edward Lawrence on Wednesday. US Treasury Secretary Steven Mnuchin also said on Wednesday that the US and China were on track toward signing the first phase of a trade agreement next month.