Forex
Asia FX rises, dollar at 5-mth low as soft inflation fuels rate cut bets
© Reuters.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar hovered near five-month lows as soft U.S. inflation data spurred increasing bets on interest rate cuts from the Federal Reserve in 2024.
Trading volumes were muted on account of year-end holidays in several major markets. A light economic release schedule this week also pointed to few novel cues for markets.
Still, a weaker dollar and optimism over rate cuts in 2024 put most Asian currencies on course for strong gains in December. Recent gains also helped Asian currencies recover a measure of losses against the dollar over the past year.
Japanese yen sees some strength as BOJ talks pivot
The rose 0.1% on Tuesday, as Bank Of Japan Governor Kazuo Ueda flagged some progress towards achieving the central bank’s 2% annual inflation target.
Progress towards the inflation target raises the possibility of an early policy pivot by the BOJ, Ueda said. The BOJ has kept interest rates at negative levels for nearly eight years.
The bank is still expected to pivot away from its ultra-dovish stance in 2024, although it has given scant cues on the timing of such a move. Still, a more hawkish BOJ bodes well for the yen, which was battered by rising U.S. interest rates through 2023.
Data released last week showed fell sharply in November, and was now closer to the BOJ’s annual target.
Broader Asian currencies also advanced tracking a softer-than-expected reading on the U.S. – the Fed’s preferred inflation gauge.
The rose 0.3% in holiday trade, while the and the added 0.2% each.
The rose 0.5%, while the lagged its peers, trading sideways near record lows.
The also lagged its peers, falling 0.1% amid persistent concerns over an economic slowdown in China. This notion was a key weight on the yuan through 2023, and limited a recovery in the currency over the past month.
Focus is now on data for December, due next week.
Dollar at 5-mth low as early rate cut bets grow
The dollar also saw extended losses after the PCE reading, amid growing bets that the Fed could cut interest rates by as soon as March 2024.
The and fell 0.1% each in Asian trade, and were at their weakest since late-July.
But the PCE reading still remained well above the Fed’s 2% annual target. The reading also came on the heels of warnings from several Fed officials that bets on early interest rate cuts were overly optimistic.
The shows markets pricing in an over 70% chance the Fed will cut rates by 25 basis points in March. But the bank will also have much more U.S. economic data to consider in the interim.
On Monday, Bank of America (BofA) provided insights into the potential actions of Commodity Trading Advisors (CTAs) in the coming week.
According to BofA, CTAs might continue to sell the U.S. dollar (USD) against most currencies following a trend that emerged after the Consumer Price Index (CPI) report led to a weakening dollar. The bank’s models indicate that USD long positions have been reduced this week.
The bank’s analysis suggests that in the foreign exchange (FX) market, CTAs are likely to persist with short covering in the euro (EUR), British pound (GBP), and Canadian dollar (CAD).
Additionally, there is an expectation for CTAs to increase their recently established long positions in the Australian dollar (AUD) and potentially initiate a long position in the Mexican peso (MXN), given the positive trend strength for the peso.
In the commodities sector, despite an increase in the price of gold last week, the trend for the precious metal declined, prompting CTAs to sell, albeit at a slower pace. BofA anticipates that this trend of selling gold and oil will continue into the next week.
The analysis also noted that CTAs’ long positions in are nearing extremely high levels, while long positions in aluminium are being unwound. In contrast, soybeans are experiencing short covering.
The bank’s report serves as a gauge of how trend-following traders might adjust their portfolios in response to market movements.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
On Monday, Bank of America (BofA) analysts provided insights into the current state of G10 foreign exchange (FX) markets, noting a general sentiment of disappointment among investors due to the markets’ lack of volatility.
Despite a recent reversal in the U.S. dollar (USD), major currency pairs have not moved significantly, staying within their established ranges. BofA anticipates further depreciation of the USD, yet it emphasizes that the currency’s movements are expected to remain close to year-end consensus forecasts.
The analysis highlighted that while markets have expressed a desire for more excitement in G10 FX trading, they must come to terms with the inherent trade-off between carry trade opportunities and higher volatility. Carry trades, where investors borrow in low-yielding currencies to invest in higher-yielding ones, have been identified as a dominant trend post-global financial crisis.
However, this strategy tends to reduce market volatility, leading to what BofA describes as an “uninspiring” and “stuck in the mud” trading environment.
BofA’s commentary suggests that the pursuit of carry as a passive strategy has been a factor in dampening volatility in the FX markets. The firm underscores that investors should not expect both high carry returns and high volatility, as these market conditions are typically mutually exclusive. The lack of clear fundamental trends in G10 FX has been a source of frustration for markets, but the current trend of carry is clear, even if it leads to lower volatility.
The analysts also touched upon the anticipation around the next batch of U.S. data, which many investors hope might shift the narrative. However, BofA indicates that such expectations may be overly optimistic. The firm’s message to the markets is to adjust expectations and accept the current dynamics, with the USD continuing to play a central role in the G10 FX space.
In summary, BofA’s analysis points to a continuation of the recent patterns in G10 FX markets, with a slight downward trend in the USD value but within the bounds of recent trading ranges.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – The U.S. dollar is trading in a calm fashion against the majors of late, and these narrow ranges will likely stay for a while longer, according to Goldman Sachs, with divergence having to wait.
AT 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded unchanged at 104.330, steadying after losing around 1% last week in the wake of soft U.S. inflation data.
“We think there is only limited room for the market to press Dollar shorts on the back of the inflation news,” said analysts at Goldman Sachs, in a note dated May 17.
“After all, while the prints were mostly in line with expectations, they were not in line with the target. As a result, the news does not change the policy outlook much beyond reinforcing the recent rhetoric.”
The subsequent market response has been reminiscent of the post-March FOMC FX reaction, when the response to ‘dovish dots’ stalled not because of fresh data, but instead because FX is still a relative game, and the Dollar fundamentals have not shifted much, the investment bank added.
And, this time around, we think the rally in front end rates looks more consistent with cyclical concerns rather than dovish expectations.
“That matters for FX because there is a narrow path for the Dollar to depreciate on a broad basis when growth is softening,” the bank added. “This is especially true in the current environment when faster Fed cuts would likely be met with easier policy abroad as well.”
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