EM Asian currencies likely to advance further on high bar for future Fed rate hikes, rising optimism U.S.-China trade deal: Scotiabank

The emerging market Asian currencies are expected to advance further on a high bar for future Fed rate hikes and increasing optimism for the US and China to reach the phase-1 trade deal, according to the latest research report from Scotiabank.

The US economy added more-than-expected 128,000 jobs in October with the unemployment rate ticking up to 3.6 percent from 3.5 percent a month ago. Meanwhile, US private wage growth has been anaemic and has stalled again recently.

Average hourly earnings were up 3.0 percent in October from a year earlier, down from a peak of 3.4 percent reported in February this year. The overall pace of job growth has slowed in the US economy this year, although the revisions for August and September indicated a milder slowdown.

Employers have added an average of 176,000 jobs per month over the past three months, down from 222,000 over the same period a year ago. It will finally erode the power of US household consumption and drag down American economic growth, the report added.

Consumer spending accounts for more than two-thirds of the US economy, remaining the main engine of American economic growth. The UST 5Y5Y forward breakeven has been falling, indicating benign inflation expectations in the US.

Moreover, US personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, fell a seasonally adjusted 0.01 percent m/m in September, the weakest monthly reading since January.

On an annual basis, the index rose 1.33 percent that is well below the US central bank’s 2 percent target. Fed Chairman Jerome Powell said at the press conference last week that the US central bank needs to see a really significant move up in inflation that’s persistent before considering raising rates to address inflation. Fed Funds Futures are now pricing in a 96 percent chance of one more 25bp Fed rate cut by September 2020.

According to statements from both sides, the US and China moved closer to a trade agreement on a Friday evening phone call between the two nations’ top negotiators, which has revived risk appetite across the markets. In addition, US Commerce Secretary Wilbur Ross on Sunday expressed optimism the US would reach the "phase-1" trade deal with China this month and said licenses would be coming "very shortly" for American companies to sell components to Huawei Technologies Co.

Ross added that Iowa, Alaska, Hawaii and locations in China are all possible places for President Donald Trump and Chinese President Xi Jinping to sign the deal. Later, Trump told reporters at the White House on Sunday that the "phase-1" trade deal with China, once completed, will be signed somewhere in the US.

"We stay with our short dollar positions versus the CNH, INR, IDR and TWD, while maintaining our short JPY/KRW cross position. Moreover, we would like to sell USD/MYR at 4.16 now, with a target of 4.10 and a stop of 4.20," Scotiabank further commented in the report.