Silver Price Forecast: XAG/USD Remains On The Defensive Below $30.50 Ahead Of US Retail Sales Data

(Nov 15): Asian currencies found some support on Friday after a volatile past few sessions, with the Singapore dollar and Thai baht creeping higher, while Malaysia's ringgit held its ground despite a slowdown in growth in the third quarter.

Stocks in the region were a mixed bag with shares in Indonesia losing 1.3% to fall to their lowest since early August, while those in the Philippines advanced 1.6% breaking a seven-day losing streak.

Emerging market assets have been under pressure since early last week on the view that US President-elect Donald Trump's proposed tariffs could further stoke inflation which could mean fewer Federal Reserve rate cuts.

"Optimism that was initially sparked by Fed easing bets around the middle of the year have largely evaporated," DBS analysts said.

"Against this challenging backdrop, scope for Asia central bank easing has become more restrained while investor sentiment on local currency bonds/rates have also become more muted."

The Malaysian ringgit and Thai baht have lost 3% and 3.8%, respectively, since Nov 5 as their open, trade-reliant economies, particularly with China, make them vulnerable to any tariff-related headwinds.

On the day, the ringgit was steady while stocks in Kuala Lumpur inched lower after third-quarter economic growth came in line with expectations but slowed from an 18-month high in the previous quarter.

The central bank maintained its growth outlook for this year between 4.8% and 5.3%, and noted the US elections results could usher in near-term volatility but that it was too early to speak on the impact.

The South Korean won, highly sensitive to the yuan and trade relations with the United States, has also lost more than 1% since the outcome of the US elections became clear. It was up 0.1% on the day.

The Thai baht added 0.4% on Friday while shares in Bangkok inched lower after a Reuters poll showed Southeast Asia's second-largest economy would log its fastest growth in more than a year in the September quarter.

The rupiah hovered near its three-month low for a second consecutive day, slipping as much as 0.6% to 15,945 per dollar. The benchmark index in Jakarta declined for the fourth straight session, weighed by mining and energy stocks.

Overnight, US Federal Reserve chair Jerome Powell said the central bank was not in a hurry to cut interest rates, indicating borrowing costs may remain higher for longer.

The dollar hovered near its one-year high against a basket of currencies, eyeing a weekly gain of 1.8% - its best performance since September, if the trend holds.

"In the longer run expect the USD to fade although near-term risks are to the upside," Maybank analysts said.

In Sri Lanka, President Anura Kumara Dissanayake's coalition, the National People's Power (NPP), won a majority in a snap general election. Markets in Sri Lanka were closed on Friday.

Source: Theedgemarkets

TOKYO (Nov 15): Bank of Japan (BOJ) governor Kazuo Ueda will deliver a speech and hold a news conference in the central Japan city of Nagoya next Monday, the BOJ said, an event that will be closely watched by markets for hints on whether it might raise interest rates next month.

It will be Ueda's first opportunity to speak directly on monetary policy since Donald Trump's victory in the US presidential election on Nov 5, and follows Japan's third-quarter gross domestic product (GDP) data, which showed surprising resilience in consumption.

Ueda's comments will be scrutinised by markets for clues on how soon the BOJ could raise interest rates again, with analysts divided on whether it may come in December or January next year.

Having faced criticism for amplifying an August market rout with its surprise interest rate hike in July, Ueda may drop hawkish hints if the BOJ wants to prepare markets for the chance of a rate increase at the Dec 18-19 meeting, some analysts say.

The yen's recent renewed fall adds pressure on the BOJ to hike rates soon, as the currency's weakness pushes up inflation and hurts households by boosting import costs, they say.

After a brief rebound to around 141 to the dollar in September, the yen has slipped back to levels before the BOJ's July rate hike. It is now hovering around 156 yen, approaching the 160 line seen as a level that heightens policymakers' alarm.

"As long as wages and services prices keep growing by around the current pace, the BOJ may find it sufficient to adjust the degree of monetary support," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

"There's also renewed inflationary risk from the weak yen," which heightens the chance of a December rate hike, she said.

Wholesale inflation accelerated in October at the fastest annual pace in more than a year, as renewed yen falls pushed up import costs for some goods, data showed on Wednesday.

Japan's short-term government bond yields rose to their highest in more than a decade on Thursday, as investors braced for the chance of a near-term BOJ rate hike.

At Nagoya, Ueda will deliver a speech and take questions from business executives from 10:00am to 11:30am (0100-0230 GMT), followed by a press conference from 1:45pm to 2:15pm (0445-0515 GMT), the BOJ said on Friday.

BOJ governors historically visit Osaka and Nagoya each year, to exchange views with business executives and explain the reasoning behind the central bank's monetary policy decisions.

The BOJ ended negative interest rates in March, and raised its short-term policy rate to 0.25% in July, on the view that Japan was on the cusp of durably achieving its 2% inflation target.

A Reuters poll conducted on Oct 3-11 showed a very slim majority of economists projecting the BOJ to forgo raising rates again this year, although nearly 90% expect rates to rise by end-March.

Source: Theedgemarkets

The Wage Price Index increased 0.8% in the September quarter and 3.5% over the year. This was in line with our expectations but – as Westpac Economics Senior Economist Justin Smirk pointed out – slightly below consensus expectations. The extent of the step down in the year-ended growth rate was well anticipated, because it reflected the dropping out of the outsized 2023 National Wage Case and related decisions from the calculation.

The RBA does not publish a full quarterly wages forecast profile, only the forecasts for year-ended growth as at June and December quarters. So, we do not know exactly what they expected for the September quarter. However, it would now need to see a bounce back in quarterly growth to around 1% for the December quarter for its end-2024 forecast to come true. Even allowing for some recent health-care agreements, we consider such a bounce to be beyond the bounds of plausibility given how smooth this series tends to be. There are no strong reasons for a change of direction of this kind, either. Surveys, data on awards and enterprise agreements and feedback from our own customers would all suggest that a sudden bounce back in wages growth is not happening.

We therefore expect that the RBA will have to revise down its near-term wages growth forecasts again in February, having already done so in November.

Forecasting is hard, so some revisions and near-term misses are par for the course. Even so, is there something going on with the way some observers think about domestic labour costs, that could be affecting their interpretation of the economic outlook? And in the case of the RBA, could this be affecting its monetary policy decision-making?

Some insights can be gleaned from the following passage from the latest Statement on Monetary Policy:

At current rates of productivity growth, WPI growth remains somewhat above rates that can be sustained in the long term without putting upward pressure on inflation. All else equal, when productivity growth is positive, WPI growth is able to outpace inflation while still being consistent with inflation at the midpoint of the target range. As trend growth in labour productivity is likely below its rate in previous decades, the sustainable WPI growth rate is probably lower than in the past and below the current rate of growth. That suggests it would be difficult to sustain wages growth at its current pace in the longer term without a higher pace of trend productivity growth.

There are a few things worth noting about this passage.

First, this reasoning comes from the markup model for forecasting inflation. As explained in a previous note, this model starts from the presumption that prices are a (roughly stable) markup over costs, including labour costs. A bit of algebra later leads to a relationship that states that wages growth minus productivity growth is approximately equal to inflation (prices growth). As discussed in that previous note, there are a lot of assumptions underlying the use of this relationship for forecasting. But more fundamentally, the WPI is not the measure of labour cost growth that maps most closely to the one implied in that relationship. Rather, the more volatile average earnings measures from the national accounts are more relevant.

Presumably the RBA has used the smoother WPI measure for ease of exposition. In that case, though, one should be even more circumspect about how tightly the relationship should hold.

Second, there are some interesting implied choices of time period used in that paragraph. For example, it is stated that future trend productivity growth is expected to be slower than the average of previous decades. This is not controversial: the late 1990s was a period of strong productivity growth globally, largely because of the adoption of personal computers and other new technologies. More recent productivity growth was slower, but not zero. The real question is whether future productivity growth will be slower than the average of more recent times, such as the years leading up to the pandemic. Perhaps this is true, but the reasons for a further slowdown have not been elucidated. While any boost from AI and other technology will indeed take time to show up in the productivity figures, just as PCs did, a further decline in global trend productivity growth is not the base case for the profession more broadly.

Third, even granting the reduced noise from using the WPI, and assuming a further slowdown in global productivity, there is the question of why the RBA repeatedly referenced the sustainability of the current rate of growth. At the time of publication, this was the year to the June quarter figure of 4.1%, not the year to September quarter figure of 3.5% just reported. Yet the RBA surely anticipated the step down in growth that was already baked in to awards and many enterprise agreements. Why the focus on the sustainability of a growth rate that everyone knew was not going to be sustained? The question also arises of how we reconcile wages growth having already rolled over, to annualised rates in the low 3s, with the RBA’s view that the labour market is still tight.

Later in the document, the step down in unit labour cost growth from 7% annualised to 3½% annualised in just six months was noted (as we had previously expected and written about). So why the implication that growth in labour costs was much stickier than that?

The deeper question is: with wages growth tracking in the low 3s and productivity growth not being zero, why has the RBA focused so much on the risk that wages growth is unsustainable?

I can’t help thinking that this partly reflects deep-seated narratives about the Australian economy not being competitive. These narratives stemmed from the so-called ‘real wage overhang’ that emerged in the 1970s following the policy-induced wages breakout then. Another bout of this belief system emerged after the mining boom and attendant strong income growth. Since then, restoring competitiveness by crimping wages growth has been a common go-to in the policy discourse in Australia, far more than elsewhere in my observation. It is as if people forget that exchange rates tend to move much faster than domestic labour costs.

In any case, even if productivity growth averages a touch lower than 1% (worse than recent history), then by the RBA’s own figuring, WPI growth averaging 3.2% (the annualised rate of the past three quarters) is well and truly consistent with inflation averaging 2½% or below. Perhaps we need to let go of the pandemic-era hangover.

The central bank kept its rate unchanged in October

The National Bank of Hungary (NBH) kept its base rate unchanged at 6.50% in October. The interest rate corridor also remained unchanged, with a range of +/- 100bp around the base rate. In line with its stability-oriented approach, this decision was driven by the significant weakening of the Hungarian forint due to global risk aversion shocks. Although there were some positive developments in the economy from a monetary policy perspective, the decision did not come as a big surprise due to market stability issues. Something similar can be said about the upcoming decision in November.

The main interest rates (%)

Source: NBH

Inflation outlook and risk perception on the sidelines, again

Headline inflation rose slightly by 0.2ppt to 3.2% year-on-year in October, below expectations. Services prices fell by 0.9% month-on-month, partly due to cheaper “other travel” (airfares) and health services, but the downside surprise was mainly due to an unexpected fall in telecommunication services prices (-6.8% MoM). However, it may be that this only reflects the impact of the free data packages offered during the September floods. If this is the case, then it was a one-off event that may re-accelerate inflation next month. Nevertheless, looking at the data, the picture is satisfactory in the short term, but there is a lot of uncertainty in the medium term, for example due to the expected high wage increase next year. All in all, the short-term inflation situation in itself could even have opened the door to an easing, but taking other factors into account, this is clearly no longer the case.

As far as risk perception is concerned, the National Bank of Hungary sees this through the lens of fiscal developments and external balances. The October budget deficit was the second largest since 2002, but this could also be a one-off event due to the September floods. The government has published the draft budget for 2025, which aims to maintain the previously telegraphed deficit level of 3.7% of GDP, and it looks more or less realistic, although we could point to several risks. On the external balances side, we haven't seen any significant deterioration from recent trends. All in all, risk perceptions alone won't play a major role in the decision-making process this time.

Headline and underlying inflation measures (% YoY)

Source: HCSO, NBH, ING

Financial market instability drives monetary policy decision

Under normal circumstances, the inflation picture and risk perceptions might move the needle a little towards easing, but with the instability in the financial markets, this idea is no longer a possibility. And the door to easing has been slammed shut, judging by the central bank's latest communication.

Since the last NBH rate-setting meeting (22 October), core rates have moved significantly higher, with both the short and long ends of the US yield curve rising by around 25bp by 13 November. The 10-year Bund also moved higher by around 7bp. This time, however, such a move in core rates did not translate into a higher risk premium for Hungarian government bond yields, as the spread between 10-year HUF and PLN government bond yields narrowed by 7bp compared to the October meeting.

The EUR/HUF exchange rate is therefore now the key issue for financial market stability. Since the October meeting, the exchange rate has moved sharply higher on the back of rising geopolitical risks and the outcome of the US presidential election, with Trump and the Republicans winning big. The already fragile currency and these changes pushed EUR/HUF to as high as 412 (3% weaker than mid-October), and the forint remained the underperformer from a regional perspective. A clear red flag in this currency move is that the market has already priced out the possibility of rate cuts in the coming months. This also means that an on-hold decision will be in line with market expectations, which is crucial given the HUF's vulnerability.

Performance of CEE FX versus EUR (end-2023 = 100%)

Source: NBH, ING

Our call

In our view, the National Bank of Hungary will leave the interest rate complex unchanged at its next rate setting meeting on 19 November. This will leave the key interest rate at 6.50%, which is a high conviction call. We also expect the Monetary Council to leave both ends of the interest rate corridor unchanged.

As the market has the same expectation, the focus will be on the communication and the forward guidance itself. While some may expect an open communication on rate hikes, citing an emergency case, such an admission itself could turn out to be a self-fulfilling prophecy and would be premature. We also don't see the central bank pulling the trigger on any kind of liquidity tightening right now, as all possible options have some limitations and could open a Pandora's box for the markets to test the central bank's pain thresholds. We therefore expect the central bank to balance the messages, to be hawkish but not to go the extra mile.

Looking further ahead, we do not expect another rate cut under the current administration (end of February 2025), and while this is not a high conviction call, the new administration will probably not be able to start cutting rates immediately either. We see the dollar continuing its gradual strengthening, the current account could weaken and there could also be some slippage in the budget. All things considered, we expect the cycle of rate cuts to continue, but not until next summer.

Our market views

In pre-election market positioning, the HUF was one of the most short currencies in the EM space, however, the market reaction disappointed, allowing some short position closing and relief for the HUF. However, the market quickly reverted back to the original view of a Trump negative scenario for CEE. Indeed, we should see weaker performance in the CEE region, global trade headwinds and more room for rate cuts in general. The HUF has fallen from an already weak position into a global view which makes a problem for a potential recovery of the currency. Positioning is probably a bit softer than before the election but still clearly short HUF.At the same time, the market has stopped pricing rate hikes into very front-end FRAs. This tells us that while the market is not aggressively negative on HUF assets, it is also too early for any major relief and the market has room to add shorts if it sees reason, which could be both local and global.

Next week's NBH meeting may put the HUF under pressure again. We thus expect EUR/HUF to remain around 410 with constant pressure from the dollar. And in the medium term, we expect EUR/HUF to move higher to 420 next year. The market has outpriced almost all rate hike expectations from very front-end FRAs and FX implied yields, while two rate cuts have returned to pricing in the longer term after the HUF market saw some relief after the US election. Valuations still look cheap in both IRS and HGBs from this perspective. However, as with FX, it is hard to see a major rally here at the moment. Although local data of low inflation and weaker growth would indicate more rate cuts, it seems clear the NBH does not want to go in that direction for some time and the risk of a rate hike has not been completely taken off the table by the market given the fragile FX. Still, in these conditions the belly and long-end should have some chance to normalise slightly and revert some of the steepening we've seen in previous months. Overall, we prefer to wait a bit longer on the sidelines here before we see any major signs of relief.