Barclays: The Federal Reserve's slowing pace of interest rate cuts may put significant pressure on Asian currencies
Barclays strategists pointed out that the slowdown in the Federal Reserve's interest rate cuts may put pressure on Asian currencies, especially those central banks in Asia that rely on Fed policies. Although the Fed has begun to cut rates, the strength of the dollar still poses a depreciation risk for Asian currencies. It is expected that these central banks may delay their rate cut plans and will need to implement larger cuts in the future to respond to economic conditions. In addition, the market's reaction to Trump's potential re-election will be more composed, and the performance of the yen and Indian rupee will also be affected
According to the Zhitong Finance APP, Barclays strategist Zhang Meng pointed out that the Federal Reserve's interest rate cut of 25 basis points in November aligns with market expectations, while the uncertainty regarding whether to continue cutting rates in December has increased. The slowdown in the Fed's rate-cutting pace may put significant pressure on Asian currencies, especially for central banks in Asian countries that rely on Fed policy guidance. Even though the Fed has begun to cut rates, Asian currencies still face depreciation pressure due to the strength of the dollar. Central banks in these countries may have to delay their rate-cutting plans, leading to the possibility of larger-scale cuts in the future to address economic conditions.
Barclays' expectations are consistent with previous views that if Trump wins the election, China will introduce more substantial stimulus measures to offset potential negative impacts. These larger-scale stimulus measures may be announced at the National People's Congress in March next year. However, unlike the last time Trump was elected, the market is now more familiar with his governance style. In terms of the economic structure between China and the U.S., the current inflation level in the U.S. is higher than it was then, while China's industrial structure has a stronger capacity to withstand pressure. Therefore, the market is expected to respond more calmly to the measures taken after Trump's re-election.
After the U.S. election, the Indian rupee performed worse than expected for two reasons: first, some capital has flowed out of the stock market since September; second, investors tend to adopt low-risk investment strategies on the eve of the U.S. election. The yen is more affected by Trump's policies: since October, investors have begun to engage in carry trades; on the other hand, the results of the Japanese election were below expectations, weakening market expectations for hawkish policies and thus diminishing support for the yen.
Recently, Barclays' U.S. macroeconomic research team raised its inflation forecast for the U.S. for 2025-26 and lowered its GDP growth forecast. Additionally, it is expected that the Fed will only cut rates twice in 2025, in March and June. After the U.S. election results are settled, investors adopting a wait-and-see attitude have led to a weakening of the dollar, but as the Fed slows its rate-cutting pace, the long-term decline of the dollar index is also expected to slow.
December is a peak period for Chinese companies to convert foreign exchange, so the dollar typically experiences seasonal depreciation. However, after Trump took office, as risk aversion increased, investors may choose to hoard dollars, leading to increased demand for the dollar. Therefore, the dollar's exchange volume against the yuan in December may decrease compared to before, coupled with the possibility that companies may have already converted foreign exchange in September, providing some support for the yuan, although the effect is limited. In the medium to long term, it is expected that the stimulus measures announced on November 8 will support the yuan's fundamentals. However, actions that Trump is expected to take regarding tariffs and other issues may push up the dollar, and the yuan is expected to weaken slowly