Forex
Column-Asian FX at crossroads as yen, yuan diverge: McGeever
By Jamie McGeever
ORLANDO, Florida (Reuters) – Japanese and Chinese monetary policy is diverging, meaning other Asian currencies may now also be at a crossroads.
Do currencies, such as the South Korean won, Indian rupee and Indonesian rupiah take their cue from a firming yen being supported by expectations of policy tightening from the Bank of Japan, or from a depreciating yuan being weighed down by the People’s Bank of China’s need to ease policy to stimulate a struggling economy?
Until recently, the yen and yuan had been joined at the hip, with both under heavy selling pressure as a relentless ‘higher for longer’ Fed outlook caused the U.S. dollar to rally. But that relationship and U.S. rate expectations have both shifted.
Between late April and mid-July, the simple 30-day rolling correlation between the yen and yuan steadily strengthened to its most positive level in 10 months. But it has subsequently reversed.
This is largely because the PBOC surprised markets last week by cutting key interest rates. And this week the yuan, which is tightly controlled by the central bank, was fixed at the weakest level against the dollar this year. Meanwhile, Chinese bond yields are at record lows, and pressure on the exchange rate is firmly to the downside.
The yen, meanwhile, has jumped some 8% from its recent 38-year low against the dollar. The BOJ followed up March’s historic rate hike – the first in 17 years – with a larger-than-expected increase on Wednesday and signaled its commitment to end its decades-long use of ultra-loose policy.
Of course, around $100 billion of yen-buying intervention from Tokyo in the last few months has put a floor under the currency, and the BOJ’s approach to raising rates is hardly gung-ho. So the yen is not a sure-fire bet to strengthen aggressively from here.
But the policy divergence with China is clear, and it’s muddying the waters for other Asian currencies.
From China’s mini-devaluation in 2015 to the beginning of the Federal Reserve’s recent rate-hiking cycle, every Asian currency was more sensitive to dollar/yuan than dollar/yen, especially the won, rupiah, Malaysian ringgit and Taiwanese dollar. Even India’s rupee, the Asian currency least influenced by the yuan, was still three times more sensitive to moves in China’s currency than Japan’s.
However, once the Fed started tightening policy in 2022, Asian currencies began to be led mostly by the extraordinary rise in dollar/yen. According to analysts at Goldman Sachs, longer-term correlations show that the yen’s influence on Asian currencies surged dramatically when U.S. rates started rising.
But that correlation has faded since the Fed stopped hiking a year ago.
“As such, the broad USD and matters more for Asian FX than ,” they wrote in a recent report.
So if the yuan stays weak, Asian currencies could remain on the soft side even as a Fed easing cycle weighs on the dollar. That’s probably not bad news – given China’s economic struggles and the likely slowdown in U.S. growth, Asian capitals may welcome weaker exchange rates more than they fear the inflationary consequences.
Beijing likely won’t be too upset if the yuan and yen diverge.
Since the onset of the pandemic in March 2020, Japan’s currency has depreciated around 30% against the yuan. Or to put it another way, on a simplistic exchange rate basis, Japanese goods became 30% cheaper over that time compared with equivalent Chinese goods on the international market.
Meanwhile, China is also facing the specter of an intensifying trade dispute with the U.S. The trade war between the two countries during Donald Trump’s presidency was followed by protectionist policies of President Joe Biden’s administration, and the dark cloud of much heavier U.S. tariffs after November’s election is looming.
This has all had the expected impact: U.S. imports from China as a share of its total imports fell by 8% over the 2017-2023 period, according to Oxford Economics. However, the share of U.S. imports from Europe, Mexico, Vietnam, Taiwan and South Korea rose. Meanwhile, these countries – especially Vietnam – all saw imports from China rise as a share of their total imports over the same period.
Beijing will want to ensure that any deterioration in bilateral U.S.-China trade continues to be made up for elsewhere. A weaker yuan, relative to its main regional rival the yen, might help.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Tomasz Janowski)
Investing.com – The U.S. dollar edged higher Thursday, bouncing off its over one-year low after the Federal Reserve announced an outsized interest rate cut, while sterling gained ahead of the Bank of England’s latest policy-setting meeting.
At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 100.410, having fallen to a more than 12-month low in the previous session.
Large Fed cut confirmed
The started its latest rate-cutting cycle on Wednesday, trimming interest rates for the first time since March 2020 by a hefty 50 basis points to a range of 4.75% to 5%.
Fed Chair Jerome Powell said that risks between higher inflation and more labor market weakness were now evenly balanced, and that the central bank was likely to cut rates further amid growing confidence that inflation will fall.
But Powell also said that the bank had no intention of returning to an ultra-low rate regime as seen during the pandemic, and that the Fed’s neutral rate will now be much higher than seen in the past.
“Where does the Fed’s decision leave the dollar,” analysts at ING ask, in a note. “In our view, still in a softer position compared to most developed market peers. Powell tried to mitigate the dovishness of the outsized rate cut, but that it would be hard to fight the perception that it was the dovish market pricing that pushed the Fed over the line for the 50bp move. If the Fed is perceived as unwilling to disappoint market expectations, investors may continue to prefer erring on the dovish side.”
Attention turns to the release of the weekly data, for the latest clues over the health of the important labor market.
Sterling in demand ahead of BoE meeting
In Europe, rose 0.3% to 1.3253, after climbing to 1.3298 in the previous session, its strongest level since March 2022.
The meets later in the session, and is expected to hold its key interest rate at 5%, after kicking off its easing with a 25-bp reduction in August.
“The inflation picture simply hasn’t improved enough to warrant more easing just yet,” said ING.
UK came in at 2.2% on an annual basis last month, close to the bank’s medium-term target, but services inflation is running hot at an annual 5.6%.
traded 0.3% higher to 1.1149, not far from the three-week high hit in the previous session.
The cut rates for the second time this year last week, but a degree of uncertainty exists over when the next move will be.
Eurozone inflation is still not as low as the ECB would like, Bundesbank President Joachim Nagel said on Wednesday, so interest rates need to remain sufficiently high to resolve price pressures.
While inflation fell to 2.2% in August and may fall even closer to the ECB’s 2% target this month, it will likely rise again towards the end of the year and could end 2024 around 2.5%.
Yen retreats ahead of BOJ meeting
rose 0.3% to 142.75 as traders also positioned for no changes to local interest rates after a meeting on Friday.
The central bank is widely expected to keep rates unchanged, but could still signal future rate hikes on an elevated outlook for inflation.
Japanese is also due on Friday.
traded 0.2% lower to 7.0698, ahead of a decision by the People’s Bank of China on Friday. The central bank is expected to leave this key rate unchanged.
By Sameer Manekar
(Reuters) – Analysts remained bullish on most Asian currencies despite marginally dialling back some bets, a Reuters poll showed on Thursday, as a defensive U.S. dollar driven by a dovish Federal Reserve enhanced the appeal of risk-sensitive assets.
Long bets were the highest on the Malaysian ringgit and the Thai baht, with those on the latter at their peak since January 2023, driven by strong growth fundamentals and stabilising politics.
Responses to the fortnightly poll of 10 economists and analysts were received before the U.S. Federal Reserve’s half-point rate cut and Bank Indonesia’s surprise quarter-point rate cut on Wednesday.
Anticipation of Fed rate cuts pushed the dollar to the defensive, providing a much-needed breathing space for emerging markets and improving their allure. Most Asian currencies logged a stellar recovery in August against the dollar.
“We do not rule out further bouts of USD weakness in the weeks ahead and expect overall downward pressure on USD/Asia FX to be sustained,” analysts at Barclays said.
The is trending near 100 against a basket of major currencies, down from 104 at the end of July.
The analysts said they expect Asian currencies to continue to appreciating in the fourth quarter, but foresee a reversal in the first half of 2025.
Ryota Abe, an economist at Sumitomo Mitsui (NYSE:) Banking Corp, said the market view of Fed rate cuts by the year-end “looks excessive” which could lead to correction in Asian emerging market currencies.
Bullish bets on the Chinese yuan and Singapore dollar were dialled back to levels seen four weeks ago, while those on the Philippine peso hit a four-year peak.
Analysts were long on the Indonesian rupiah for the fourth consecutive iteration of the poll – the longest since May 2023 – underlining the recent appreciation stemming from robust economic fundamentals and growing inflows into emerging markets.
The rupiah has appreciated more than 6% since July and is expected to continue marching on after Bank Indonesia’s (BI) surprise rate cut decision to support growth, front-running the Fed.
Barclays analysts said BI will “likely broadly match or slightly under-deliver versus the Fed in terms of the magnitude of total cuts” which should not “necessarily see the IDR fall out of markets’ favour from a rates-differentials perspective”.
The Indian rupee continued to remain out of analysts’ favour, although short positions were halved since early August as the currency staged a recovery following a sell-off driven by the unwinding of yen carry trades.
The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.
The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars.
The figures include positions held through non-deliverable forwards (NDFs).
The survey findings are provided below (positions in U.S. dollar versus each currency):
DATE
19-Sep-24 -0.67 -0.9 -1.12 -1.18 -0.66 0.33 -1.3 -1.1 -1.33
05-Sep-24 -0.85 -1.09 -1.26 -1.05 -0.77 0.21 -1.46 -1.00 -1.22
22-Aug-24 -0.62 -0.93 -1.08 -1.26 -0.70 0.21 -1.57 -1.03 -1.16
08-Aug-24 -0.02 0.05 -0.61 -0.02 0.59 0.60 -0.78 -0.29 -0.57
25-Jul-24 1.07 0.79 -0.33 0.35 0.86 0.12 0.39 0.43 0.02
11-Jul-24 1.05 0.87 0.06 0.73 0.68 0.22 1.03 0.86 0.51
27-Jun-24 1.34 1.28 0.80 1.49 0.88 0.46 1.00 1.37 0.91
13-Jun-24 0.95 0.87 0.62 1.22 0.64 0.37 1.00 1.23 0.92
30-May-24 1.05 0.72 0.33 0.94 0.53 0 0.81 1.19 1.00
16-May-24 1.05 0.96 0.35 0.96 1.02 0.39 1.23 1.29 1.00
Investing.com– Most Asian currencies moved in a flat-to-low range on Thursday as the dollar firmed sharply after an outsized interest rate cut by the Federal Reserve was offset by less dovish signals on future rates.
The Japanese yen was among the worst performers for the day, retreating amid pressure from the dollar and as traders priced in no changes to interest rates by the Bank of Japan later this week.
Broader Asian currencies were muted tracking mixed signals from the Fed.
Dollar rises past 50 bps rate cut, Fed outlook less dovish
The and both rose about 0.4% in Asian trade, extending overnight gains.
Strength in the greenback came even as the Fed – the higher end of market expectations- to a range of 4.75% to 5%.
Fed Chair Jerome Powell said that risks between higher inflation and more labor market weakness were now evenly balanced, and that the central bank was likely to cut rates further amid growing confidence that inflation will fall.
But Powell also said that the bank had no intention of returning to an ultra-low rate regime as seen during the pandemic, and that the Fed’s neutral rate will now be much higher than seen in the past.
While traders were still pricing in at least 125 bps worth of cuts by end-2024, Powell’s comments spurred expectations that rates will be higher than initially expected in the medium and long term.
This notion pressured most Asian currencies.
Japanese yen weakens with BOJ on tap
The Japanese yen’s pair rose 0.6% to 143.12 yen and was among the worst performers in Asia.
The currency was pressured by strength in the dollar, while traders also positioned for no changes to local interest rates after a on Friday.
The central bank is widely expected to keep rates unchanged, but could still signal future rate hikes on an elevated outlook for inflation. Japanese is also due on Friday.
Broader Asian currencies were mostly mixed. The Australian dollar’s pair rose 0.4%, buoyed by a stronger-than-expected reading on the in August.
Strength in the labor market gives the Reserve Bank of Australia more headroom to keep rates high for longer, which it is more inclined to do amid signs of sticky inflation in the country.
The Chinese yuan’s pair reversed early gains to trade sideways, with focus squarely on a l decision by the People’s Bank on Friday. The central bank is expected to leave the LPR unchanged.
The South Korean won’s pair jumped 1% as local trade resumed after three days of holidays. The country’s shrank slightly in August.
The Indian rupee’s pair was flat, but moved further away from the 84 rupee level. The Singapore dollar’s pair was flat.
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