Fed, PBoC likely to maintain pro-growth stance amid benign inflation outlook; gloomy global trade outlook to curb gains in export-driven currencies, says Scotiabank

The Federal Reserve and the People’s Bank of China (PBoC) is expected to maintain their pro-growth stance amid benign inflation outlook, although the two nations are leading global economic growth, according to the latest research report from Scotiabank.

The high-yielding currencies such as the INR and IDR will likely continue benefiting from the so-called carry trade, while gloomy global trade outlook could curb gains in the export-driven currencies including the KRW and TWD.

The BEA's advance estimate showed Friday that the US economy grew an annualized 3.2 percent on quarter in the first three months of 2019 compared to market estimate of 2.3 percent. It is a leg up from the 2.2 percent pace of expansion recorded during the fourth quarter. However, some of the underlying detail was less buoyant.

While US consumer spending growth slowed from the fourth quarter, the nation’s economic growth relied heavily on a build-up in inventories and a drop in imports. In addition, the weak core PCE inflation data have raised investor expectations that the US central bank could cut rates this year, the report added.

Fed Funds Futures are now pricing in a 23.6bp rate cut by the end of 2019, according to CME FecWatch Tool. It will limit upside room for the 10-year UST yield, which could prop up US stocks somewhat further amid still-low risk free interest rate and risk premium.

In addition, China’s April official manufacturing PMI due Tuesday is likely to rally further from 50.5 in March, with the nation’s economic recovery gaining further momentum. Chinese President Xi Jinping said at the opening of the Belt and Road Forum in Beijing on Friday morning that China won’t engage in currency depreciation that harms other countries, and will keep the yuan stable to aid the global economy.

"We maintain our short TWD/IDR targeting 450 and long CNH/TWD cross positions, while staying vigilant on market sentiment as it would send USD/JPY suddenly lower should risk aversion escalate abruptly," Scotiabank added in its commented.