EM Asian currencies likely to advance in weeks ahead, remain susceptible to headlines till first week of Jan: Scotiabank

EM Asian currencies are expected to advance in the weeks ahead, while remaining susceptible to the headlines till the first week of January, according to the latest research report from Scotiabank.

The Fed left its benchmark interest rates unchanged at its final meeting of the year on December 11 and signalled an indefinite pause. According to the latest dot plot, top Fed officials pencilled in no rate changes next year, and saw only one increase each in 2021 and 2022.

In the meantime, Fed Funds Futures are still pricing in a 88 percent chance of one more 25bp rate cut by December 2020. The Fed’s dovish stance will sustain a risk-friendly mood, the report added.

In addition, the phase-one trade deal to be signed will defuse prolonged US-China trade tensions and boost manufacturing activity in the world’s two largest economies, sparking risk appetite further in the holiday season.

On Sunday, the State Council’s customs tariff commission said that China has suspended additional tariffs on some US goods that were due on December 15, after reaching the phase-one trade deal with the US on Friday.

The nation will also refrain from implementing tariffs on vehicles and auto parts from the US. Moreover, with the phase-one deal including a currency clause, China is believed to stick to its "floating exchange rate system with adjustments and management" and keep the yuan exchange rate basically stable at a reasonable and equilibrium level.

"In our opinion, the PBoC will allow the yuan to rally if the dollar weakens broadly and step in to defend the yuan exchange rate if it faces depreciation pressure. Diverging US-Eurozone economic surprise index suggests downside potential for the DXY Index," Scotiabank further commented in the report.