Forex
Asia FX weakens with yuan volatile, dollar steady ahead of PCE data
Investing.com– Most Asian currencies moved in a flat-to-low range on Friday with the Chinese yuan logging wild swings amid suspected intervention by the People’s Bank, while the dollar steadied ahead of key inflation data.
Weak risk appetite saw traders remain averse to most regional currencies this week, while the Japanese yen saw extended buying as it benefited from safe haven demand, while an unwinding carry trade also benefited the currency. The yen was by far the best performer among its Asian peers this week.
Commodity-linked currencies, particularly those with exposure to China, saw some relief on Friday, with the Australian and New Zealand dollars strengthening slightly. But the two were nursing steep losses this week.
Dollar steady after strong GDP; inflation, Fed in focus
The and both steadied on Friday after seeing some resilience on stronger-than-expected data for the second quarter.
The reading pushed up hopes that the U.S. economy was headed for a soft landing, where growth will remain steady while inflation eases.
Focus is now squarely on data- which is the Federal Reserve’s preferred inflation gauge. The reading is due later on Friday and is expected to show inflation eased further in June.
PCE data also comes just days before a , where the central bank is widely expected to keep rates unchanged. But any signals on interest rate cuts will be closely watched, with markets keeping intact expectations for a September cut.
Chinese yuan logs wild swings after suspected intervention
The Chinese yuan weakened on Friday, pulling back after suspected intervention by the Chinese government saw the currency appreciate sharply against the dollar on Thursday.
The pair had fallen sharply from near eight-month highs on Thursday, with its outsized drop sparking speculation over government intervention. The currency was grappling with increased selling pressure after a series of surprise interest rate cuts by the PBOC this week.
Doubts over a slowing economic recovery also weighed on the yuan.
Japanese yen outperforms, BOJ awaited
The Japanese yen was among the best performers this week, extending a strong run after suspected intervention by Tokyo earlier in July boosted the currency.
The pair was down 2.4% this week- its biggest weekly drop since late-April.
However, the yen’s advance was somewhat stalled by , which showed inflation remained largely muted in July.
The soft inflation reading came just days before a , with analysts split over whether the central bank will have enough headroom to hike interest rates by 10 basis points.
Broader Asian currencies were mostly nursing steep losses against the dollar this week, as risk appetite soured. The Australian dollar’s pair and the New Zealand dollar’s pair were both down nearly 2% this week.
The Indian rupee’s pair steadied after apparent Reserve Bank intervention pulled the pair away from record highs hit on Thursday.
The South Korean won’s pair rose 0.3%, while the Singapore dollar’s pair was flat after the Monetary Authority of Singapore kept monetary policy unchanged.
Bank of America (BofA) analysts highlighted a shift in market sentiment, identifying long U.S. dollar positions as the most crowded trade, and now a significant headwind for the currency. This perspective aligns with BofA’s recent reports on the U.S. dollar, emphasizing the stark contrast between current market positions and historical trends.
The analysts’ findings indicate a growing apprehension among market participants regarding global inflation, particularly with a re-acceleration anticipated by 2025. Euro Area inflation expectations are notably visible, underscoring the broader concerns about inflationary pressures.
Additionally, while emerging market (EM) investors seem to have discounted the worst-case scenarios related to tariffs, the uptick in sentiment is perceived as tentative. The cautious stance of EM investors reflects the uncertainty and challenges in the global trade environment.
BofA’s analysis suggests that the heavy positioning in favor of the U.S. dollar could be problematic. The report, dated January 14, 2025, points out that the extent of USD long positions is exceptional not only in a historical context but also when compared to the past year’s trends.
Furthermore, the discrepancy between conviction and positioning is evident, as only a fifth of respondents consider long USD their highest conviction trade. This is despite 42% of those surveyed expecting the peak of 10-year U.S. Treasury yields to exceed 5%, as revealed in a separate exhibit from the bank’s research.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – Donald Trump’s inauguration is right around the corner, and UBS has advised its clients to go long the pair to hedge policy risks before the big day.
In a light data week, Trump’s inauguration will take center stage next week, according to analysts at UBS, in a note dated Jan. 16.
“While we don’t know what his first moves will be, we doubt it will be to levy big tariffs on day one. But that doesn’t mean markets won’t stop focusing on it. FX markets are not priced for large tariffs. Big tariff moves could still weaken the CNY more meaningfully, hurting pro-growth currencies such as the EUR,” the Swiss bank said.
Given the risks, volatility is likely to increase in the months ahead. Option volatility has already risen, though this is more due to diverging economic growth expectations between the US and the rest of the world and to country- specific issues like those in the UK and Canada. This means any market-negative developments should still lead to higher actual and implied volatility.
USD/CNY has reached new highs of late, trading at the upper limit of the fixing range, the Swiss bank said.
“We expect the yuan to face increased pressure once Trump firms up his tariff plans targeting China, which may lead the People’s Bank of China (PBoC) to permit further depreciation of the currency,” UBS added.
A weaker CNY against the dollar could help mitigate some of the negative impacts of any tariff hikes. Additionally, vulnerable domestic economic fundamentals are likely to weigh on yuan sentiment, contributing to higher FX demand and investment outflows.
“Overall, we like to be long , targeting a move toward 7.50 in the coming which could also provide positive carry of 2.1% p.a. We believe a stop-loss of 7.20 is prudent,” UBS said.
At 09:10 ET (14:10 GMT), USD/CNY traded marginally lower at 7.3289.
UBS revised its inflation forecast for Japan, projecting higher inflation rates in the coming years due to a robust US dollar and increased energy prices.
The UBS FX team adjusted their foreign exchange outlook, now expecting the exchange rate to hit 150 by the end of 2025, up from the previous estimate of 145. This adjustment is based on the backdrop of a strong US dollar.
The revised forecast anticipates a 0.1-0.2 percentage point increase in inflation for 2025 and 2026, driven by higher energy costs and consumer price index (CPI) goods. The core-core CPI, which excludes volatile fresh food and energy prices, is projected to remain above 2% through 2025.
UBS now expects it to reach 2.0% year-over-year at the end of 2025, a slight uptick from the previous estimate of 1.9%. UBS also highlighted that food inflation, currently at 4.2% year-over-year, is expected to stay at similar levels at least through the first half of the current year. This is attributed to the yen’s depreciation and unstable supply conditions.
The research firm notes that while service inflation has been relatively low at 1.5%, particularly due to weak housing rent and public services prices, an acceleration in overall service inflation is anticipated.
However, the development of inflation in specific service components, such as housing rent and public services, which respectively account for 37% and 25% of the weight in services within the inflation calculation, remains uncertain. U
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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