U.S. Inflations Rise Ahead of Fed Meeting, Impacting Asian Currencies
The U.S. Bureau of Labor Statistics reported higher-than-expected Consumer Price Index (CPI) figures for October, which may affect monetary policy ahead of the Federal Reserve’s upcoming meeting. Headline CPI increased by 0.4% month-over-month, while core inflation rose by 0.3% month-over-month. Due to last year’s government shutdown, no year-over-year data was available. This CPI report, issued just before the Fed’s meeting on December 8-9, has led financial markets to price in a 25 basis points rate hike for December, with expectations for a potential 50 basis points increase rising to 13.6% at one point following the data release.
U.S. Treasury yields saw a notable rise, with two-year yields climbing 18 basis points to reach 4.74%. The Dollar Index also strengthened, surpassing 102. Federal Reserve Governor Christopher Waller communicated a hawkish stance before the release, emphasizing the need for further monetary tightening to address high inflation. He indicated that if core CPI increased by 0.3% or more in October, a 50 basis point rate hike in December should be considered.
In Asia, the impact of higher U.S. interest rates and a stronger dollar is being moderated to some extent by a significant drop in oil prices. Brent crude oil fell below $90 per barrel for the first time since August amid ongoing Middle East peace talks. This decline provides relief for energy importers in the region, although the overall trend of increasing U.S. yields and a stronger dollar remains a concern for Asian currencies in today’s trading session.
China’s trade data for October revealed a continued reliance on external demand, highlighted by a 35.2% year-over-year increase in exports, bolstered by a remarkable 66.6% rise in high-tech shipments. Imports also rose, increasing by 41.6% year-over-year, with integrated-circuit imports experiencing a striking 78% surge. However, these figures contrast with softer domestic inflation readings, indicating robust global demand alongside subdued domestic consumption. The strong export figures are expected to support the Chinese yuan.
In Japan, the latest Summary of Opinions from the Bank of Japan (BoJ) has reinforced market expectations of another rate hike, with several members advocating for rates to move closer to neutral as underlying inflation touches 2%. Financial conditions are reportedly remaining accommodative, and the market is currently pricing an 82% probability of a December hike, lending some support to the yen.
Meanwhile, the Vietnamese dong (VND) has gained strength in recent weeks due to improved foreign exchange supply, supported by trade surpluses and foreign direct investment inflows. In response, the State Bank of Vietnam has implemented measures to absorb excess FX liquidity, including a USD2 billion, 182-day USD/VND swap launched on November 6 and regular offers to buy dollar at VND25,500 starting November 11. These actions aim to rebuild foreign exchange reserves while preventing excessive appreciation of the dong, with the VND25,500 purchase rate acting as a potential floor for USD/VND trade.
