Asian FX on strong footing; More room for PBoC easing
With PMIs rebounding for leading Asian exporters (Korea and Taiwan), the Fed signalling a prolonged accommodative stance, and the US-China Phase 1 trade deal in the pipeline, Asian FX rates have started 2020 on a strong footing. But 2020 has introduced new risks, particularly in geopolitics. Miscalculations by the US or Iran cannot be discounted, with both sides seemingly favouring bravado over negotiations. Meanwhile, greater incidence of Chinese credit events in late 2019 suggests that we are not past the peak for credit stresses. Beyond economics, politics may yet pose further surprises this year, as we have seen tensions simmer in India and Hong Kong. Even if the search for yield continues in Asia for now, risks of being sideswiped by non-traditional developments are manifestly present.
China: Steadying inflation gives PBoC more room to manoeuvre
The pork-driven inflation appears to be peaking. The consumer price index came in at 4.5% in December, unchanged from November. The flat CPI inflation largely reflected a deceleration in food and pork prices. The former rose 17.4% YoY, retreating from an over 11-year high of 19.1% in November. The latter increased 97% YoY, slower than the 110.2% expansion previous month. Non-food inflation edged higher to 1.3% from 1.0%, mainly due to rising energy inflation. Underlying price pressures remained benign. Core inflation stayed at 1.4%, the 14th consecutive month of a reading below 2%. For FY19, headline CPI rose 2.9%, inching closer to the government's target of about 3% for 2019.
Looking forward, the tight supply of pork will be gradually relaxed as the authorities have started releasing pork reserves while ramping up imports from its trading partners. In November, pork imports jumped 151% YoY to about 230,000 tons. As such, we expect CPI inflation to peak at about 5% in 1Q20 before easing. Further pressure on inflation this year could come in the form of oil prices due to geopolitical tensions in the Middle East. Yet the risk is manageable, in our view. During periods of large swings in oil prices, the authority can intervene by delaying or reducing prices adjustments, thus limiting oil’s pass-through.
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