Forex
Asia FX weak ahead of US inflation; yen dips as BOJ gives little support
Investing.com– Most Asian currencies weakened on Friday, while the dollar steadied in anticipation of key inflation data that is expected to factor into the Federal Reserve’s stance on interest rate cuts.
While an overnight drop in the dollar- following weaker-than-expected U.S. gross domestic product data- offered some relief to Asian units, this was largely offset by persistent bets on higher-for-longer U.S. interest rates. The dollar also trimmed some of its losses in Asian trade.
Japanese yen weakens, USDJPY crosses 156 after BOJ
The Japanese yen was an underperformer, with the pair rising past 156 to new 34-year highs after comments from the Bank of Japan sparked doubts over just how much capacity the central bank had to raise interest rates further.
The BOJ after a historic hike in March. The central bank also forecast higher inflation in the coming years.
But the BOJ also , raising doubts over just how much capacity it would have to keep raising interest rates. This presented a largely dovish outlook for the yen.
Softer-than-expected – released earlier on Friday- further sparked doubts over a hawkish BOJ.
Still, losses in the yen were limited by continued fears of government intervention in currency markets. An upcoming press conference with BOJ Governor , at 02:30 ET (06:30 GMT) also presented the possibility of more hawkish signals.
Broader Asian currencies also weakened on Friday, amid persistent fears of higher-for-longer U.S. interest rates. The Chinese yuan’s pair rose slightly and remained close to recent five-month highs.
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South Korea’s pair rose 0.4%, while the Singapore dollar’s pair added 0.1%.
The Australian dollar’s pair was supported by strong inflation data, which, coupled with higher earlier this week, sparked bets on higher-for-longer rates in the country.
The Indian rupee’s pair moved little, with traders growing wary of more volatility in Indian markets as the 2024 general elections began.
Dollar steadies with PCE inflation on tap
The and rose marginally in Asian trade, recovering some overnight losses.
showed growth in the U.S. economy cooled more than expected in the first quarter, amid sticky inflation and high rates.
But inflation remained uncomfortably high, with the growing more than expected.
This put upcoming data squarely in focus. The reading is the Federal Reserve’s preferred inflation gauge.
Despite Thursday’s weak GDP reading, traders were seen steadily pricing out expectations for any near-term rate cuts by the Fed. The now shows traders pricing in rate cuts only by September, or the fourth quarter.
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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