September 27th Financial News

Core inflation in Japan’s capital matched the central bank’s 2 per cent target in September, data showed, a sign the economy is making progress in meeting the criteria for further interest rate hikes.

While political and overseas economic uncertainties may prod the Bank of Japan to stand pat in October, the solid inflation reading will keep alive market expectations for another rate hike in December or early 2025, analysts say.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.0 per cent in September from the previous year, data showed on Sept 27, matching the BOJ’s target and the median market forecast.

It slowed from a 2.4 per cent increase in August due largely to the resumption of government subsidies to curb utility bills. Tokyo CPI data is considered a leading indicator of nationwide prices.

A separate index that strips away the effects of both fresh food and fuel costs, closely watched by the BOJ as a broader price trend indicator, increased 1.6 per cent in September from a year earlier after rising at the same pace in August.

Service prices rose 1.2 per cent in September after a 1.3 per cent gain in August, suggesting that companies were passing on labour costs from rising wages as the BOJ projects.

The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25 per cent in July on the view Japan was making steady progress towards durably achieving its 2 per cent inflation target.

BOJ governor Kazuo Ueda has said the bank will keep raising rates if inflation remains on track to stably hit 2 per cent as it projects, though he stressed the bank will spend time gauging how global economic uncertainties affect Japan’s fragile recovery.

Japan’s economy expanded an annualised 2.9 per cent in the second quarter as steady wage hikes underpinned consumer spending. Capital expenditure continues to grow, though soft demand in China and slowing US growth cloud the outlook for the export-reliant country. 

Source: Straitstimes

BMI, a unit of the Fitch group, has revised its year-end forecast for the ringgit from 4.55 against the US dollar to 4.0, reflecting the local currency’s robust performance in the third quarter of 2024 (3Q2024).

"Over the medium term, we continue to hold a positive view on the ringgit, as narrowing yield differentials with the US and a relatively resilient growth outlook will bode well for the currency," the research firm said in a note on Friday.

However, risks to BMI's forecasts are skewed towards a weaker ringgit, largely dependent on the US Federal Reserve’s (Fed) interest rate trajectory and mainland China’s growth.

Looking beyond the six-month horizon, BMI forecast the ringgit to strengthen by 9% next year, reaching 3.55 against the greenback by the end of 2025. 

The house noted that the ringgit had reversed its broad weakening trend since the start of 2024, gaining 12.1% in 3Q2024, making it the best-performing emerging-market currency in the region. 

"To account for the stronger-than-expected performance in 3Q2024, we have revised our forecasts for the unit to average 4.35, from 4.55 previously".

The research firm noted that the ringgit touched multi-year trendline resistance at 4.20 on Monday, and see potential for it to reach 4.0 by the end of 2024, although short-term depreciation is possible due to an oversold relative strength index.

BMI said interest rate differentials between the US and Malaysia are expected to narrow in favour of the ringgit.

The Fed opted for a 50-basis-point (bps) cut this month, taking the funds rate down to 5.0%. 

BMI now thinks the Fed will continue with its cutting cycle in the coming months, lowering its policy rate further by a further 75 bps in 4Q2024, compared with 50 bps previously.

"The narrowing yield differentials will be supportive of the ringgit, particularly if we are right in expecting Bank Negara Malaysia (BNM) to leave its overnight policy rate on hold at 3.0% through end-2024."

Resilient short-term portfolio inflows are also supportive of the ringgit. Cumulative inflows have picked up sharply since July, particularly in debt, and are on track to record their best performance in five years.

Beyond six months, BMI expects the ringgit to average 3.80, compared with 4.48 previously, in 2025.

"The primary driver will be further policy loosening worth 125 bps in 2025, which will take the Fed funds rate down to 3.0% by year end," added BMI, which expects the Malaysian central bank to remain on hold at 3.0% through end-2025.

Malaysia’s relatively resilient real gross domestic product (GDP) outlook also supports the ringgit, the house added.

It expects real GDP growth to slow marginally from an anticipated 4.7% in 2024 to 4.6% in 2025. Meanwhile, it projected a more significant slowdown in US growth, lowering its forecast from 2.5% to 1.5% for the same period. 

Meanwhile, BMI said the ringgit is likely to benefit from a sustained current account surplus, though it forecast a slight narrowing from 2.6% of GDP in 2024 to 2.4% in 2025.

It said resilient foreign direct investment (FDI) inflows will continue to support the local note. Malaysia has consistently attracted higher net FDI inflows as a share of GDP compared to regional peers like Thailand and Indonesia.

The Malaysian government’s recent announcement of a 0% tax rate for family offices in the planned financial zone of Forest City and reduced income tax rates for foreign workers are expected to boost FDI from 1Q2025.

In summary, the ringgit’s outlook remains strong due to narrowing yield differentials, resilient economic growth, and robust FDI inflows. 

Source: The edge markets

West Texas Intermediate (WTI), the US crude oil benchmark, is trading around $71.30 on Friday. WTI price edges lower as Saudi Arabia is committed to pressing ahead with output increases later this year.

Saudi Arabia is ready to abandon its unofficial price target of $100 a barrel for crude oil as it prepares to increase production, even if the move results in a prolonged period of low oil prices, per the Financial Times. 

Furthermore, the expectation that oil production in Libya will rise after rival political factions agreed to appoint a new central bank governor on Thursday exerts some selling pressure on the WTI price. "The prospect of additional supply from Libya and Saudi Arabia has been the main driver behind the latest weakness," said Ole Hansen, an analyst at Saxo Bank.

On the other hand, the downside of the black gold might be limited as Chinese officials announced a fresh stimulus package earlier this week. The prospect of higher Chinese demand due to the recent measures could lift the WTI price as China is the world’s largest crude importer and second-largest consumer. 

On Friday, the People's Bank of China (PBOC) cut the seven-day repo rate to 1.5% from 1.7% on Friday. Additionally, the Chinese central bank announced to cut the amount of the reserve requirement ratio (RRR), the required minimum capital banks must hold in reserve, by 50 basis points (bps).

Source: FXSTREET

The Swiss National Bank met expectations by cutting its key interest rate by 0.25 percentage points to 1.0%, slowing the pace of the move to normalisation after two cuts of 0.50 percentage points each in March and June. The central bank warned of further rate cuts in the coming quarters. In a commentary, the SNB noted a further marked slowdown in inflation and lowered its end-2024 forecast from 1.4% to 1.0%.

The bank cited the expensive franc as an important reason for the rate cut and inflation, which signals to FX market participants that the current situation is not comfortable. Previously, watchmakers had indicated that the strong franc was hurting sales. On Wednesday, the UBS economic expectations index fell to its lowest level since January at -8.8 from -3.4, against expectations for an increase to 2.7. The trade surplus has also been shrinking for two months. It remains high by historical standards but has been flat for more than a year and has failed to meet expectations against a multi-year rising trend.

It seems that some market participants were prepared for a sharper contraction, as the current decision caused the franc to strengthen by more than 0.6% across the market. The USDCHF pair has been trading in a range of less than 1.5% for the past month, following a 7% decline since the beginning of July. If this was an attempt by the SNB to reverse the trend and begin to weaken the franc, it was rather weak and unimpressive.

Although the Swiss central bank started before the Fed, its 25-point policy easing a week after the FOMC’s 50-point cut looks rather faded. This means that a period of currency market stabilisation could be followed by a new wave of Swiss franc appreciation if the SNB does not act as decisively as the Fed, or even more so.

Gold price (XAU/USD) extended its record-breaking run for the fifth straight day on Thursday amid the emergence of fresh US Dollar (USD) selling. Despite the fact that several Federal Reserve (Fed) officials this week tried to push back against bets for a more aggressive policy easing, the markets are still pricing in a greater chance of another oversized rate cut in November. This overshadowed the better-than-expected US macro data and weighed heavily on the buck, benefiting the non-yielding yellow metal. 

Apart from this, persistent geopolitical tensions stemming from the ongoing conflicts in the Middle East continue to drive haven flows and turn out to be another factor acting as a tailwind for the Gold price. That said, the prevalent risk-on mood across the global equity markets – bolstered by China's stimulus measures – caps any further gains for the XAU/USD. Investors also seem reluctant and prefer to wait on the sidelines ahead of Friday's release of the US Personal Consumption Expenditure (PCE) Price Index.

Daily Digest Market Movers: Gold price bulls turn cautious amid risk-on mood, ahead of US PCE Price Index

Federal Reserve Governor Michelle Bowman again defended her decision to vote against the oversized rate cut in September and said that the upside risk to inflation is still prominent.

Earlier this week, Atlanta Fed President Raphael Bostic warned that the central bank needn't go on a mad dash to lower rates, while other Fed officials left the door open for large rate cuts. 

Fed Governor Lisa Cook said on Thursday that she endorsed the 50 basis points rate cut last week as upside risks to inflation have diminished and increasing downside risks to employment.

According to the CME Group's FedWatch Tool, market participants see over a 50% chance that the Fed will lower borrowing costs by 50 basis points at the November policy meeting. 

Data released by the Bureau of Economic Analysis (BEA) on Thursday showed that the US economy grew at a 3% annual rate in the second quarter, matching the original estimates.

Separately, the US Census Bureau reported that new orders for manufactured durable goods stagnated in August, while orders excluding transportation items rose 0.5% last month. 

Adding to this, the US Labor Department said that initial claims for state unemployment benefits dropped to 218,000 for the week ended September 21 – marking the lowest since mid-May.

The data did provide some intraday respite to the US Dollar bulls, though the initial market reaction turned out to be short-lived in the wake of dovish Fed expectations. 

Apart from this, the risk of a further escalation of geopolitical tensions in the Middle East and a broader regional conflict lifts the safe-haven Gold price to a fresh record high. 

Meanwhile, interest rate cut is expected to boost global economic activity, which, along with stimulus measures from China, fuels the risk-on rally and caps the XAU/USD.

The People's Bank of China (PBOC) cut the seven-day repo rate to 1.5% from 1.7% and lowered the amount of the Reserve Requirement Ratio (RRR) by 50 bps on Friday.

Friday's release of the US Personal Consumption Expenditure Price Index might provide some impetus to the metal, which remains on track to register a third straight week of gains. 

Technical Outlook: Gold price consolidates before the next leg up, dips to $2,625 might be bought into

From a technical perspective, the Relative Strength Index (RSI) on the daily chart has been flashing overbought conditions and holding back bulls from placing fresh bets around the XAU/USD. That said, the recent breakout through a short-term ascending trend channel suggests that the path of least resistance for the Gold price is to the upside. Bulls, however, need to wait for some near-term consolidation or a modest pullback before positioning for an extension of the recent well-established uptrend. 

Meanwhile, any meaningful dip could be seen as a buying opportunity near the channel resistance breakpoint, around the $2,625 region. This, in turn, should help limit the downside for the commodity near the $2,600 mark. The latter should act as a key pivotal point, which if broken decisively should pave the way for some meaningful downside in the near term.

Source: FXSTREET

News Conference by the SNB Governor Jordan