ASIA FX: Mixed SEA FX Trends, Ringgit Seen Undervalued

JGB futures are weaker but in the middle of today’s range, -21 compared to settlement levels.

• Outside of the previously outlined M2 & M3 Money Stock, there hasn't been much by way of domestic drivers to flag. Machine Tool Orders data is due soon.
• Cash bonds are ~1bp richer in today’s Asia-Pac session after Monday’s bear-steepener. The focus remains on this week's CPI and PPI inflation data on Wednesday and Thursday respectively.
• Analysts’ forecasts for November US CPI imply remarkably steady sequential inflation versus October, with the MNI median and average for core expected to show an unchanged 0.28% M/M. Combined with Thursday’s estimates for PPI inputs, core PCE is in turn seen moderating to between 0.18-0.25% M/M in November, vs 0.27% in October. (See MNI CPI Preview here)
• Cash JGBs are flat to 2bps cheaper across benchmarks beyond the 1-year. The benchmark 5-year yield is 0.6bps higher at 0.728% after today’s supply.
• Today’s 5-year bond auction demonstrated robust demand, with the auction price surpassing dealer expectations, the cover ratio rising significantly and the auction tail narrowing slightly.
• Swap rates are little changed out to the 10-year and 3bps higher beyond. Swap spreads are tighter out to the 10-year and wider beyond.
• Tomorrow, the local calendar will see PPI data and BSI Large All Industry Survey results.

RBA-dated OIS pricing is 2-9bps softer across 2025 meetings after today's RBA policy decision. While the RBA Board held the cash rate at 4.35%, guidance was softened with the Board “gaining” some confidence inflation will return to target.

• A 25bps rate cut is now fully priced by April versus May pre-RBA.
• Market expectations for the September meeting are now 45-50bps softer than mid-November, driven by concerns over weakening domestic economic growth.
• Notably, in mid-November, a full 25bps cut wasn’t expected until August, marking a significant shift toward earlier rate cuts.
• The probability of a rate cut at today’s meeting had been low, with markets assigning only an 8% chance. 

Figure 1: RBA-Dated OIS – Today Vs. Mid-November

 Source: MNI – Market News / Bloomberg

We said in our RBA Preview that the first step for a move towards easing would be the removal of the phrase “not ruling anything in or out”. The Board did that in its December statement as well as its vigilance to upside inflation risks. It now appears to have gained “some confidence” that inflation is “moving sustainably towards target”. However, underlying price pressures remain “too high” and it is likely to be “some time before inflation is sustainably in the target range”.  

• The next RBA meeting is on February 18, which will include an updated outlook, and Q4 CPI will print on January 29 and Q4 retail sales volumes on February 3. Currently the RBA is forecasting trimmed mean at 3.4% y/y. A material downside surprise with services inflation trending lower may be enough for easing to start. The following meeting is April 1, after Q4 wages and GDP, which may make this date more likely.
• Q3 wages and growth printing below RBA expectations appear to have driven the Board’s dovish shift. As a result, there seem fewer uncertainties over the effectiveness of monetary policy “working”.
• The removal of “vigilant to upside risks” has been replaced with “risks remain”, so we’re not there yet. In terms of those risks, the commentary on the labour market was unchanged noting recent stabilisation and conditions remaining tight. Weak productivity is still a concern.
• The Board observed that Q3 growth was the “slowest” since the early 1990s, except for Covid. Aggregate consumption being “more resilient” was removed but while Q3 consumption was “slower than forecast”, October/November data are signalling a “pick-up”.
• See full statement here.