Markets brace for tighter Fed path: CIMB Securities

Financial markets are expecting a more aggressive US Federal Reserve interest rate path, according to CIMB Securities Sdn Bhd. The firm indicates that markets are pricing around 80 basis points of additional Fed tightening by 2027, which is roughly equivalent to three rate hikes. In contrast, the latest Federal Open Market Committee (FOMC) projections suggest only a 25-basis-point increase in the fourth quarter of 2026 with no further hikes anticipated in 2027.

The FOMC currently anticipates a policy rate of 4.25 percent after the expected increase in the fourth quarter.

CIMB Securities notes that market forecasts for end-2027 rates are quite dispersed, ranging from 3.25 percent to 4.50 percent, with a median estimate of 3.50 percent. The firm has revised its forecasts for US Treasury yields, raising them relative to German and Japanese government bonds. It has increased its end-2027 two-year US Treasury-Bund and US Treasury-JGB spread assumptions by eight and 15 basis points, respectively.

This wider yield advantage is expected to support the US dollar and reduce the likelihood of sustained appreciation in the euro and yen.

The firm also considers that a return of Brent crude oil prices to $100 a barrel could provide additional support for the dollar, particularly as higher energy prices typically weigh on currencies of major energy importers like those in Asia. CIMB Securities has maintained its near-term US Dollar Index (DXY) forecast at 101 but has raised the projection for the third quarter of 2027 to 100.

However, if Brent crude prices fall below $90 a barrel, this support for the dollar may be reduced, with the DXY potentially reaching a ceiling of 99.8 under a lower oil-price scenario.

For Asian currencies, higher US rates could be partially offset by relatively stable conditions in China and higher regional yields. CIMB Securities anticipates Asian currencies to stay within their 12-month forecast ranges, with potential yuan strength ahead of the China-US summit providing some stability for the ringgit, Singapore dollar, and Thai baht.

However, higher oil prices and US rates pose greater risks to the Indonesian rupiah, potentially necessitating a 25-basis-point Bank Indonesia rate hike in the fourth quarter of 2026.