Fed likely to maintain dovish stance by end-2020, prop up EM Asian currencies: Scotiabank

The Federal Reserve is expected to maintain its dovish stance with the Fed Funds Futures market almost fully pricing in two 25 bp rate cuts by end2020. It will finally prop up EM Asian currencies as the 2019-nCoV outbreak is likely to show signs of stabilization in the next one to two weeks as Dr Zhong and Dr Zhang said earlier, according to the latest research report from Scotiabank.

US real consumer spending nudged up 0.1 percent m/m in December, down from a 0.3 percent m/m growth in the prior month. In the meantime, US consumer income increased 0.2 percent m/m in December compared to market estimate of 0.3 percent m/m, which casted a shadow on the outlook for consumption growth this year.

In addition, PCE inflation and core PCE inflation, the Fed’s favourite inflation gauges, both came in at 1.6 percent y/y in December. It indicated still-muted inflationary pressures, the report added.

While the FOMC last week judged the current stance of monetary policy is appropriate to support sustained expansion of economic activity, Fed Chairman Jerome Powell said at his post FOMC press conference that the Fed is "not comfortable with inflation running persistently below our 2 percent symmetric objective."

"We maintain our short USD/CNH and short USD/INR positions as China’s central bank is expected to defend the yuan exchange rate amid hovering concerns over the 2019-nCoV outbreak," Scotiabank further commented in the report.

Meanwhile, the PBoC said in a statement dated February 2 that it will conduct CNY 1.5tn of reverse repos on Monday when onshore markets reopen after the extended Chinese New Year holiday, injecting a net CNY150 billion of funds to the banking system for onshore financial market stability.