Marketmind: Don't doubt the dollar
A look at the day ahead in Asian markets from Jamie McGeever.
A look at the day ahead in Asian markets from Jamie McGeever.
Reports of the dollar's decline may have been greatly exaggerated, and if that turns out to be the case, it's bad news for Asia.
World stocks have rebounded strongly, bond yields and the dollar have fallen, and financial conditions eased significantly over the last month as investors bet that the Fed is preparing the ground for the much-vaunted 'pivot'.
The MSCI World Index is up 15% from its Oct. 13 low, while the MSCI Asia ex-Japan index is up 15% in the last four weeks and on course for its best month since May, 2009.
The big banks are starting to publish their 2023 outlooks, and FX analysts at HSBC and Morgan Stanley are among those who reckon that the dollar is peaking and will weaken next year.
But recent rhetoric from Fed officials has been flat out hawkish - even from former 'doves' like San Francisco Fed President Mary Daly - and it would not be a surprise if the dollar were to resume its 2022 rally into the year end.
This deepens the problems that Asian markets and policymakers have been facing all year - historically low exchange rates, FX market intervention, rising inflationary pressures, and raising domestic interest rates into weak growth.
If the Fed is not as close to ending its hiking cycle as previously thought, most Asian central banks won't be either. Asia's powerhouses Japan and China are loosening policy, of course, and their currencies and FX reserves are taking a hit.
This is the broad context in which the Bank of Korea meets later this week. All but one of the 25 forecasts in a Reuters poll is for a 25 basis points hike to 3.25%.
BOK policymakers and others in the region will take comfort from the fall in global oil and commodities prices. But if Fed hawks and dollar bulls set the market tone, they may have to tighten more than they had envisaged.
Emerging market FX rates
Three key developments that could provide more direction to markets on Monday:
- Fed's Daly speaks
- U.S. Treasury auctions 2-year, 5-year notes
- Germany PPI inflation (October)
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