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Asia FX drifts higher as dollar steadies; Aussie supported by RBA

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Asia FX drifts higher as dollar steadies; Aussie supported by RBA
© Reuters.

Investing.com– Most Asian currencies rose slightly on Tuesday, recovering marginally after growing expectations of higher-for-longer U.S. interest rates pushed up the dollar and weighed heavily on regional markets.

Regional currencies saw some relief as the U.S. dollar steadied after racing to near three-month highs this week. The dollar was buoyed chiefly by a string of hotter-than-expected U.S. economic readings, as well as comments from Federal Reserve Chair Jerome Powell, who said that rates will remain steady in the time being. 

Australian dollar boosted by hawkish RBA

The was the best performer among its Asian peers, rising 0.6% from an over 1-½ month low after the Reserve Bank of Australia , and warned of more rate hikes if inflation remained sticky. 

The RBA’s warning caught some traders off-guard, especially as recent declines in Australian inflation spurred bets that the RBA could signal interest rate cuts this year. But the bank gave no such indication on Tuesday. 

Other data pointed to more cooling in the Australian economy. While grew 0.3% quarter-on-quarter in the December quarter, they still shrank 1% from last year. 

Broader Asian currencies rose slightly. The added 0.1% after sinking to an over one-month low, while the rose 0.1%. 

The was flat, but was once again close to breaking below the 7.2 level against the dollar- its weakest level in 1-½ months. A string of weak purchasing managers index readings over the past week dented the currency, and also set a dour tone for upcoming for January. 

The inflation data is also due before the week-long Lunar New Year holiday, which begins this Friday. 

The tread water around the 83 level, with focus turning to a this Thursday. The RBI is widely expected to keep rates steady, while its forecasts for inflation and economic growth will be closely watched.

The rupee had now largely reversed a mild boost from the Indian government unveiling a relatively conservative budget for the coming financial year, which was intended to help ease India’s massive fiscal deficit. 

The jumped 0.5%, but remained in sight of a nearly two-month low.

US rate outlook a key weight on Asian currencies 

Most Asian currencies were nursing steep losses over the past two sessions, as markets began steadily pricing out the chances of early interest rate cuts by the Fed. Higher-for-longer rates diminish the appeal of risk-driven, high-yielding assets, and also limit foreign capital flows into regional markets.

Powell’s comments on late-Sunday reiterated the Fed’s earlier messaging that resilience in the economy gives the bank more headroom to keep monetary policy restrictive. This saw traders largely unwind bets that the Fed will begin trimming rates in March or May.

The showed an 83% chance the Fed will keep rates steady in March, and a 35% chance the Fed will keep rates steady in May, up substantially from a 9.9% chance seen last week.

Forex

Dollar drifts lower; euro edges higher ahead of key wages data

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Dollar drifts lower; euro edges higher ahead of key wages data
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Investing.com – The U.S. dollar slipped lower in early European trade Tuesday, but remains close to recent highs given the prospects of higher-for-longer U.S. interest rates, while the euro faces a wages test later in the session.

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.082. 

Dollar quiet ahead of Fed minutes

The greenback has edged lower Tuesday with U.S. traders set to return after Monday’s Presidents’ Day holiday, but remained close to three-month highs amid mounting expectations that the Federal Reserve will delay the start of its rate-cutting cycle to the start of the summer compared with the expected March at the beginning of the year.

Data released last week showed both U.S. and increased more than expected in January, while Fed official Mary Daly stated on Friday that there is still “more work to do” to bring inflation back down to the U.S. central bank’s 2% target.

The U.S. economic data calendar is largely empty Tuesday, likely resulting in quiet trading ahead of the release of the of the Fed meeting from last month, scheduled for Wednesday. 

“The view that the U.S. data will turn at some point, the Federal Reserve will cut, and the dollar will decline remains a consensus one (and often translates into selling USD rallies),” said analysts at ING, in a note. 

“We favor a strong dollar in the near term as U.S. data remains supportive, but this looks increasingly to be the perfect recipe for range-bound trading.”

Euro awaits ECB wage data

In Europe, traded 0.2% higher at 1.0795, helped data showing the eurozone’s current account in a larger than expected surplus in December, pointing to economic recovery.

Traders are now keenly awaiting the release of regional fourth-quarter negotiated wages data, due later in the session, given the importance Europe’s central bank has placed on wage growth as it attempts to contain inflation.

“This wage indicator had been on a steady rise since mid-2022, and a decline, even if contained, should be welcomed by the ECB,” ING added.

traded 0.1% higher at 1.2605, in quiet trading ahead of the release of the monthly surveys of business activity later this week.

The data is expected to show that British business activity is improving, led by a surge in service-sector activity to its fastest pace since last May.

This follows Friday’s data which showed U.K. grew at their fastest pace in nearly three years in January.

China cuts key rate, yen remains weak

In Asia, traded largely unchanged at 7.1983, helped by a strong daily midpoint fix after the People’s Bank of China cut its benchmark five-year loan prime rate by a bigger-than-expected 25 basis points to 3.95%, a record low. 

The move provided little cheer to Asian markets as it also underscored increasing government anxiety over an economic slowdown in Asia’s biggest economy.

rose 0.1% to 150.31, with the yen weakening past the 150 level as the prospect of a slow exit from the Bank of Japan’s ultra-dovish monetary stance put pressure on the Japanese currency.

Breaks above 150 have attracted government intervention in the past, with officials also offering verbal warnings on any such moves last week.

 

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Forex

Investors are buying back into the pound’s pizazz

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Investors are buying back into the pound's pizazz
© Reuters. FILE PHOTO: Pound and U.S. dollar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

By Amanda Cooper

LONDON (Reuters) – The pound is playing catch-up with the dollar as investors beef up their bullish positions, and may get extra oomph from data this week showing British business activity is among the strongest in the developed world.

Monthly surveys of business activity this week are expected to show the UK topped the league table in February, well ahead of the euro zone and beating even the United States, which in the last year has been one of the few major countries not to have shown a dip into contraction.

This so-called “U.S. exceptionalism” has kept the dollar buoyant and investor confidence in a soft landing for the U.S. economy running high.

Economists polled by Reuters expect an index of British business activity to have risen to 52.7 in early February, led by a surge in service-sector activity to its fastest pace since last May.

Sterling is down just 0.9% against the dollar so far in 2024, having clawed back up from a 1.5% year-to-date loss two weeks ago.

Just four months ago, the International Monetary Fund declared Britain would be the slowest-growing economy among the Group of Seven nations in 2024.

A lot has changed since then, not least Germany tilting into actual recession and France barely growing. Data last week showed the UK, too, registered two straight quarters of negative growth last year.

The euro has fallen to its weakest in six months against sterling, having lost around 2% in value against its cross-Channel rival since the start of the year.

For the past few months, investors have enjoyed the pound’s higher yield that has derived from the view that, even though the economy is sluggish, persistent inflation will mean the Bank of England will have to keep interest rates higher for longer.

Weekly data from the Commodity Futures Trading Commission (CFTC) shows speculators lifted their bullish sterling position to $3.971 billion in the week to Feb 13, just shy of last July’s nine-year high.

Leveraged funds, which include hedge funds and money managers, have aggressively added to their long sterling positions since early December, and now hold their largest bet on a pound rally since October.

Aside from the pound’s yield appeal, investors may be taking heart finally from the data too.

JPMorgan nudged up its 2024 UK growth forecast in January, while Deutsche Bank last week said it had made a modest upward tweak to its quarterly growth estimates.

Bank of America has turned bullish on sterling and last week boosted its year-end target for the pound to $1.37 – some 8.5% above where it is trading right now.

In a note last week, ING issued a reminder not to “get carried away” by signs of green shoots in the economy – the BoE is focussed on services and wage inflation right now – but acknowledged that the outlook for Britain’s economy is starting to brighten.

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Forex

Asia FX creeps lower, dollar firm as China rate cut gives little support

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Asia FX creeps lower, dollar firm as China rate cut gives little support
© Reuters.

Investing.com– Most Asian currencies crept lower on Tuesday amid persistent concerns over a slowing Chinese economic recovery and higher-for-longer U.S. interest rates, while the dollar edged up and remained near three-month highs.

The People’s Bank of China cut its benchmark five-year by a bigger-than-expected 25 basis points to 3.95%, a record low. But the move provided little cheer to Asian markets, given that it also underscored increasing government anxiety over an economic slowdown in Asia’s biggest economy.

The fell slightly after the move, although bigger losses in the currency were held back by a stronger-than-expected midpoint fix from the PBOC. 

Still, the yuan remained close to its weakest level in three months, and was also close to  breaking above the 7.2 level to the dollar. 

Broader Asian currencies were still reeling from a string of stronger-than-expected U.S. inflation readings from last week, which put the dollar within sight of a three-month high. But the greenback saw few cues for movement from a U.S. holiday on Monday.

The and both rose 0.1% each in Asian trade, buoyed by the prospect of higher-for-longer U.S. interest rates in 2024. 

The was among the worst-hit by recent fears of higher U.S. rates, with the currency weakening past the 150 level on Tuesday. The prospect of a slow exit from the Bank of Japan’s ultra-dovish monetary stance also put pressure on the yen.

Still, the yen found some support around 150 as traders watched for any potential intervention in currency markets by the Japanese government. Breaks above 150 have attracted government intervention in the past, with officials also offering verbal warnings on any such moves last week.

The fell 0.1%, even as the showed the bank still remained inclined towards hiking interest rates further to curb sticky inflation.

But the RBA also said that it was prepared to loosen monetary conditions swiftly if the Australian economy cooled too quickly due to pressure from high rates. 

The RBA had kept rates steady at 4.35% earlier in February, but had struck an unexpectedly hawkish tone- which offered some support to the Aussie. 

Among other Asian currencies, the fell 0.1%, while the fell 0.3%.

The firmed slightly below the 83 level, but still remained vulnerable.

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