Forex
Asia FX muted, dollar nurses weekly losses ahead of nonfarm payrolls
© Reuters.
Investing.com– Most Asian currencies kept to a tight range on Friday, while the dollar was headed for a negative week ahead of key U.S. nonfarm payrolls data, which is expected to provide more cues on the path of U.S. interest rates.
The data comes just a few days after the Federal Reserve kept interest rates steady and shot down expectations for an interest rate cut in March. But Fed Chair Jerome Powell struck a somewhat optimistic note on the U.S. economy, which drove investors into risk-driven assets despite the prospect of higher-for-longer interest rates.
This saw traders sell off the dollar after a short-lived bounce. The and were flat in Asian trade on Friday, and were set to lose about 0.4% this week.
This trade aided most Asian currencies, with the – which is a key indicator of risk appetite towards Asian markets- rising 0.4%. The Aussie recovered from an over one-month low ahead of a next week, where the central bank is widely expected to keep interest rates steady.
and inflation readings released this week showed that while Australian inflation was easing, it still remained well above the RBA’s target range.
Losses in the dollar offered some relief to Asian currencies after a bruising start to 2024, with most regional units logging steep losses in January.
The was flat after largely lagging its regional peers in January. But the yen found some resilience in recent sessions amid growing conviction that the Bank of Japan was close to moving away from its ultra-dovish policies this year.
The rose 0.2% as data showed grew slightly less than expected in January, while the traded sideways.
The was among the better performers this week, recovering sharply from near record lows after the ruling BJP party unveiled a surprisingly conservative annual budget, which bodes well for India’s bloated fiscal deficit.
The was flat following a stronger-than-expected midpoint fix from the People’s Bank of China. Losses in the yuan were held back by reported intervention in currency markets by the PBOC, after a series of underwhelming purchasing managers index readings for January.
The readings indicated that an economic recovery in China showed little signs of improving in the first month of 2024.
Markets look to May rate cut as nonfarm payrolls approach
After the Fed largely downplayed bets on a March interest rate cut, traders began pricing in a 25 basis point cut in May.
The showed traders pricing in an over 60% chance for a May rate cut, with analysts also expecting the Fed to cut interest rates at least four more times after May.
While such a scenario bodes well for risk-driven Asian currencies, the Fed has given no indication that it will trim rates by a wide margin in 2024. The central bank reiterated that its plans to cut rates will be largely dictated by the path of inflation, which has so far remained sticky.
data is expected to provide more cues on the labor market. The Fed has also cited a cooling labor market as one of the major factors to drive interest rate cuts.
Investing.com – The US dollar has gained more ground as the US presidential election draws near, UBS noted, with the market seeing rising odds of a win for Republican candidate Donald Trump.
A new USD-positive over the past week has been media reports of somewhat better outlook for Donald Trump in the latest polls, as outcomes that allow for policies such as more aggressive tariffs are viewed as more USD positive.
“Higher odds of a Trump presidency are likely to be associated with a stronger USD near term,” said analysts at UBS, in a note dated Oct. 16.
Where does this leave us now with our USD views?
Our expected ranges between Sep–Dec 2024 incorporated the possibility of a material USD rebound between now and year end, even if our year-end forecasts see a modestly lower USD from current levels.
Last week, with an eye to our year end forecast, we entered a long call reverse knockout, but we are not willing to implement a similar trade yet for and .
The spot is still far enough from our range extremes and high JPY implied volatility and negative carry make long JPY positions unattractive so close to US elections.
Turning to this week’s ECB meeting, the market is very confident that another 25bp rate cut will be delivered and we do not have a strong reason to disagree.
Market expectations are very muted for any form of surprise, and risk reversal skews bid again for EUR puts point to a market that is already primed for the risk of EUR softness.
With market pricing in line with our economists’ terminal rate expectations, we see EUR/USD as more exposed to US developments near-term, leaving us reluctant to fade recent softness on ECB reasons alone.
At 06:30 ET (10:30 GMT), EUR/USD rose 0.1% to 1.0894, USD/JPY gained 0.1% to 149.34 and AUD/USD fell 0.2% to 0.6685.
Investing.com – The European Central Bank holds its latest policy-setting meeting later this week, and Citigroup advises selling any rallies in the euro around this key event.
Markets are pricing in around 49 basis points of easing over the remaining two ECB meetings this year, which could limit dovish repricing around Thursday’s event, according to analysts at Citi, in a note dated Oct. 15.
“We see scope for a tactical bounce in EUR around this Thursday’s ECB meeting, which we like fading into November as US election risk premium materializes,” Citi said.
That said, “we like fading any subsequent rallies in EUR as we approach November and US election risk premium gets better priced.”
There is some evidence of this unfolding, the bank added, as EUR looks undervalued on its short-term fair value model and as Citi’s FX Positioning data suggests adding to EUR shorts.
“But our broader FX election basket still screens as undervalued relative to Trump betting markets, and we remain short EURUSD in both spot and options,” says Citi. “We would look to sell any retest of the 1.10 double top neckline — any break above there risks a move towards our adjusted stop of 1.1050, but if that resistance holds, we have higher conviction of a move towards our (and the double top) target of 1.08, with potential overshoot towards 1.07.”
At 05:25 ET (09:25 GMT), traded largely flat at 1.0892, almost 2% lower over the last month.
Investing.com – The U.S. dollar edged higher Wednesday, trading near two-month peaks on expectations of modest rate cuts from the Federal Reserve this year, while sterling slumped after benign inflation data.
At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 103.180, remaining close to Monday’s two-month peak.
Dollar helped by trimmed rate cut expectations
Recent data indicating a resilient economy coupled with slightly hotter-than-expected inflation in September have led market participants to trim bets for an aggressive U.S. rate reduction.
Adding to these expectations were comments from Atlanta Federal Reserve President on Tuesday, who said he had penciled in just one more interest rate reduction of 25 basis points this year when he updated his projections for last month’s U.S. central bank meeting.
Most market participants see two more cuts this year, totaling 50 bps, and traders currently lay 92% odds for a 25-basis-point cut when the Fed next decides policy on Nov. 7, with an 8% probability of no change, according to CME Group’s (NASDAQ:) FedWatch Tool.
Sterling slumps after inflation release
In Europe, slumped 0.5% to 1.3003, after data showed British inflation fell more than expected in September, paving the way for a rate cut next month.
The UK’s fell to 1.7% on an annual basis, below the forecast 1.9% and the 2.2% recorded a month earlier.
This was the first time it had fallen below the Bank of England’s 2% target since April 2021, and added to data seen earlier in the week that showed British pay grew at its slowest pace in more than two years.
“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year (November and December),” said analysts at ING, in a note.
“Given the comments by Governor Andrew Bailey earlier this month suggesting the BoE could increase the pace of easing, markets may be tempted to price in some chance of a 50bp rate cut in November.”
traded 0.1% lower to 1.0882, ahead of Thursday’s policy-setting meeting by the European Central Bank.
The has already lowered rates twice this year and a cut to the 3.5% deposit rate this week is almost fully priced in by financial markets.
“EUR/USD is predominantly driven by external factors. The substantial drop in oil prices has narrowed the scope for a further drop based on market factors, but we continue to suspect that pre-US election positioning should favor a weaker EUR/USD,” said ING.
Yuan nurses weekly losses
fell slightly to 7.1179, with the yuan nursing losses this week as sentiment soured over the country’s plans for more stimulus.
China’s Ministry of Finance said it will enact a slew of fiscal measures to boost growth, but did not specify the timing or size of the planned measures, spurring uncertainty over its effectiveness.
rose 0.2% to 149.43, with the pair climbing closer to the 150 resistance level.
data due later this week is expected to offer more cues on the Bank of Japan’s plans to hike rates further.
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