EM Asian currencies likely to advance amid global reflation policies and improving situation in China, says Scotiabank

EM Asian currencies (ex-SGD) are expected to advance amid global reflation policies and improving coronavirus situation in China in the weeks ahead, according to the latest research report from Scotiabank.

US consumer prices rose at a 2.5 percent annual pace in January after increasing 2.3 percent in December. Meanwhile, core consumer prices, which exclude often-volatile food and energy categories, posted a steady increase of 2.3 percent over the year last month.

US nonfarm business sector’s unit labour costs growth typically leads US core CPI inflation by about 12 months, suggesting the latter will likely remain steady in the first half and then rise in the second one. US core PCE inflation, the Fed’s favourite inflation measure, has been consistently staying below US core CPI inflation, the report added.

Steady inflation and contained inflation expectations justify the Fed’s current dovish tone. Fed Chairman Jerome Powell warned lawmakers on Tuesday that the coronavirus epidemic sweeping China could pose broader economic risks, even as he signalled that the US central bank was comfortable holding interest rates steady for now.

Powell added that "the current stance of monetary policy will likely remain appropriate" as long as incoming economic information remains in line with the Fed’s outlook.

With mounting concerns over the COVID-19 outbreak, more and more EM Asian economies are preparing fiscal stimulus in addition to central bank monetary easing.

On Thursday, China's Hubei province announced 242 new deaths from the novel coronavirus (Covid-19) on Wednesday, twice as many as on the previous day. In addition, new infections there jumped by 14,840. The spike in numbers is partly due to a broader definition of what constitutes a confirmed case, to include people diagnosed on the basis of their symptoms rather than testing positive.

An abrupt spike in new confirmed cases indicates Hubei province’s hospitals are able to treat most Covid-19 patients properly now, which is a positive sign in fact. In addition, it is understandable before China’s official Xinhua news agency reported that Hubei party secretary Jiang Chaoliang had been replaced by Shanghai mayor Ying Yong.

"We expect the UST 5-year forward breakeven inflation rate to remain subdued in the coming months," Scotiabank further commented in the report.