Morning Bid: RBA center stage as markets wobble

Dec 5 (Reuters) – A look at the day ahead in Asian markets.

An interest rate decision from Australia and key inflation readings from Japan and South Korea are the big market events for the Asia Pacific region on Tuesday, with investor sentiment cooled by Monday’s selloff across U.S. stocks and bonds.

Currencies will probably be most sensitive to the data and the Reserve Bank of Australia’s guidance, while stocks could struggle to make much headway given the broad-based weakness across global equities on Monday.

The relative weakness of Asian equities since the pandemic, magnified by China’s even more notable underperformance, has been quite something. But international investors appear to be in no rush to get back in en masse.

The RBA, meanwhile, is expected to keep its cash rate on hold at a 12-year high of 4.35%, according to 28 of 30 analysts polled by Reuters. The other two are going for a 25 basis point hike.

Assuming the RBA does stand pat, Governor Michele Bowman’s guidance will carry even greater weight. She has generally been more hawkish than her predecessor Philip Lowe, whom she replaced in September.

The Aussie dollar spiked to a fresh four-month high of $0.6690 on Monday before closing the day lower.

The Japanese yen, meanwhile, will be sensitive to the latest Tokyo inflation figures. Core consumer inflation in Japan’s capital likely grew in November but at slower pace than the month before, in a sign that price pressures may be easing.

The annual rate of inflation is expected to have eased to 2.4% from 2.7% – breathing room for the Bank of Japan, and maybe more selling pressure on the yen.

The U.S. dollar rose 0.5% on Monday against a basket of major currencies, supported by a rebound in U.S. bond yields as traders took some profits on last week’s sharp rally in fixed income, especially at the short end of the curve.

The slump in bond yields last month weighed heavily on the dollar, which appears to have forced the hand of hedge funds and speculators – their long dollar position worth $10 billion only a couple of weeks ago has been almost fully unwound.

If speculators go short dollars from here, Asian currencies could benefit. The relative U.S. interest rate outlook right now fits the weaker dollar narrative – futures markets have the Fed cutting rates next year more than any major or emerging market central bank.

But will the Fed cut rates by 125 to 150 basis points next year? Maybe, but it does sound quite aggressive. And even if the Fed does go that far, other central banks are sure to lower their policy rates more than markets are currently predicting.

Here are key developments that could provide more direction to markets on Tuesday:

– Australia interest rate decision

– Japan – Tokyo inflation (November)

– South Korea inflation (November)

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