EM Asian currencies to weaken moderately as smaller Fed rate cut in July could narrow yield advantage of local assets, says Scotiabank

The emerging markets Asian currencies are expected to weaken moderately as a smaller Fed rate cut in July could narrow the yield advantage of local assets while sparking a potential selloff in US and regional risky assets, according to the latest research report from Scotiabank.

The US economy added 224,000 jobs in June, compared to market estimate of 160,000. Meanwhile, US private wages rose 3.1 percent y/y in June, unchanged from a month ago. The stronger-than-expected job report has raised market concerns over a smaller rate cut from the Fed at the July 30-31 FOMC meeting, pushing up the 10-year UST yield while weighing on US stocks.

In the meantime, stubbornly benign US inflation will continue supporting a Fed rate cut later this month, particularly if considering the still inverted 3M-10Y UST yield curve. As we know, the New York Fed’s recession probability index has been persistently rising.

Investors this week will parse the minutes of the June 18-19 FOMC meeting and US CPI inflation due Thursday. More importantly, Fed Chairman Jerome Powell will testify before the House Financial Services Committee and the Senate Banking Committee respectively on Wednesday and Thursday.

It will revive risk appetite if Powell continues to hint a July rate cut with a dovish tone when testifying before Congress this week.

"Meanwhile, we keep a close eye on continued US-China trade tensions. It will take a long time for the world’s two largest economies to reach a trade deal, in our view," the report added.