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Asia FX moves little, dollar steady as U.S. inflation looms

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Asia FX moves little, dollar steady as U.S. inflation looms
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Investing.com– Most Asian currencies moved little on Tuesday, while the dollar steadied close to a six-month peak as investors hunkered down before data showing a potential rise in U.S. inflation. 

Markets were also holding out for more economic cues from China, as recent data showed some improvement in and through August. But the overall outlook for the Chinese economy still deteriorated, with a now forecasting 2023 GDP growth of 5%- in line with China’s official forecast, but lower than forecasts from investment banks. 

The remained resilient through this, with the Chinese currency rebounding from a near 10-month low this week as the People’s Bank rolled out a series of strong daily midpoints. The bank was also seen intervening in currency markets to buoy the yuan.

Uncertainty over China kept the trading in a tight range on Tuesday, while a private survey also showed that Australian deteriorated further in early-September. 

Other China-exposed currencies moved little, with the and both trading less than 0.1% in either direction.

The fell slightly after rebounding from near record lows on Monday. Markets were also awaiting readings from the country, which are expected to show continued resilience in prices through August.

Japanese yen rebounds amid hawkish BOJ talk 

The steadied on Tuesday after rebounding sharply from a near 10-month low overnight. The currency was boosted chiefly by comments from Bank of Japan Governor Kazuo Ueda, who said that an end to the BOJ’s negative interest rates could be close. 

Ueda said that the BOJ’s 2% inflation target was within sight, which would give the bank more impetus to begin raising rates after nearly a decade of ultra-loose monetary policy.

But while such a scenario bodes well for the yen, the currency was still nursing steep losses for the year, hit chiefly by a widening gap between local and international interest rates.

Worsening risk sentiment and fears of a BOJ pivot also diminished the yen’s appeal for carry trade this year. 

Dollar steady near 6-month high, CPI in focus 

The dollar moved little in Asian trade on Tuesday, seeing some consolidation after racing to a near six-month peak in recent sessions. 

The and both steadied in the low-to-mid 104s, after briefly breaching 105 last week.

Focus is squarely on due on Wednesday, which is expected to set the tone for a next week. Inflation is expected to have risen at a faster pace in August from July.

Any signs of sticky inflation gives the Fed more headroom to either raise rates further, or keep them higher for longer. While the central bank is widely expected to keep rates on hold in September, it is also expected to until at least mid-2025.

Forex

Dollar just lower; euro set for sharp weekly loss on political turmoil

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Investing.com – The U.S. dollar slipped marginally Friday, while the euro also fell, heading for a sharp weekly loss amid political turmoil in the region. 

At 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.125.

Dollar edges lower

Despite these small losses, the dollar is on course for small gains this week after the left the funds rate on hold at 5.25%-5.5%, but reduced the number of cuts projected this year to just one, from three in March.  

That said, these gains are limited after both U.S. and prices came in weaker than expected, suggesting inflationary pressures were easing, while for unemployment benefits increased to a 10-month high last week.

Despite the Fed’s June dot plot showing a median projection of just one rate cut in 2024, Goldman Sachs continues to expect a first rate cut in September and a second cut in December.

“Our 2024 inflation forecast is now a touch below the FOMC’s, which Chair Powell characterized as ‘fairly conservative.’ With two better rounds of inflation data now in hand, we think that if the next three rounds are in a similar range, the leadership is likely to push through a cut in September,” the U.S. bank added.

Euro weakens on political turmoil

fell 0.3% to 1.0708, on course to register weekly losses of around 0.8% with the European region mired in political turmoil after far-right parties made gains in European Parliament elections, which concluded on Sunday.

French President Emmanuel Macron responded to losses to the right-wing National Front party, led by Marie Le Pen, by calling for a snap election in France.

“It looks like the euro is taking another leg lower in early Europe today on news that the French parties of the Left are getting their act together to form a coalition and only run one candidate per district between them,” said analysts at ING, in a note. “This rare cooperation of the Left stands to suck support from President Macron’s party further.”

in France rose 2.6% year-on-year in May, slightly revising down its preliminary reading of a 2.7% increase published in late May.

EU-harmonised year-on-year in the bloc’s second-biggest economy accelerated in May in comparison to the April reading of 2.4%.

fell 0.2% to 1.2729, heading for small gains this week, after stronger-than-expected inflation data last month in Britain prompted investors to push back their bets on the start date for BoE rate cuts late into 2024. 

The May U.K. release is due next week, as is the Bank of England’s next .

Yen weakens after BOJ meeting 

In Asia, traded 0.3% higher to 157.56, after the disappointed markets with its plans to tighten policy.

The BOJ kept rates steady and said it will only provide clear signals on its plans to begin reducing its bond purchases at its July meeting, and that it was meeting with market participants in the interim to gain more insight. 

gained 0.1% to 7.2557, rising to a near seven-month high, with sentiment towards China battered by the EU imposing steep tariffs on electric vehicle imports from China. 

 

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Election concerns in France give euro worst week in two months

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By Karen Brettell

(Reuters) -The euro was on track for its biggest weekly fall against the dollar in two months on Friday on concerns that a new government will worsen France’s fiscal situation as a snap parliamentary election approaches.

The yen hit a six-week low against the dollar, before rebounding, after the Bank of Japan (BOJ) surprised markets with a dovish monetary policy update.

French markets saw the biggest weekly jump since 2011 in the premium that investors demand to hold French government debt and bank stocks tumbled on Friday.

The concern is “the instability combined with the already existing pressure on the budget,” said Brad Bechtel, global head of FX at Jefferies in New York, adding that “any time spreads widen in Europe, the euro suffers.”

French Finance Minister Bruno Le Maire said on Friday that the euro zone’s second-biggest economy was at risk of a financial crisis if either the far right or left won because of their heavy spending plans.

Marine Le Pen’s eurosceptic National Rally (RN) is leading in opinion polls.

“On both ends of the French political spectrum, the parties that are campaigning are fiscally expansionist parties,” said Karl Schamotta, chief market strategist at Corpay in Toronto. “Markets are mostly responding to additional fiscal stress.”

The euro is on track for a 0.95% weekly fall – its biggest since April – and was last down 0.34% on the day at $1.0699. It got as low as $1.06678, the lowest since May 1.

The euro’s weakness has helped drive the dollar higher. The – which tracks the currency against six peers – was up 0.3% at 105.55 and reached 105.80, the highest since May 2.

“We’re seeing flows into the U.S. on both ends of the spectrum – from the safe-haven side as well as on the yield-seeking side – given that U.S. yields remain well above those available elsewhere,” said Schamotta.

The European Central Bank and Bank of Canada have begun cutting rates while the Federal Reserve holds steady.

The U.S. central bank adopted a more hawkish than expected tone at this week’s meeting when Fed officials projected only one rate cut this year and pushed out the start of rate cuts to perhaps as late as December.

But for now, “the Fed is sort of taking a backseat when it comes to the dollar,” Bechtel said. Elections in emerging markets and Europe are instead driving moves, he said.

A survey on Friday showed that U.S. consumer sentiment deteriorated in June as households worried about inflation and incomes.

Other data showed that U.S. import prices unexpectedly fell in May amid lower prices for energy products, providing another boost to the domestic inflation outlook.

Softer than expected consumer and producer price inflation for May this week has helped bolster hopes that inflation will continue to ease closer to the Fed’s 2% annual target and make an interest rate cut possible as soon as September.

Chicago Fed President Austan Goolsbee on Friday said he felt “relief” after the consumer inflation data, but added there needs to be more progress.

The yen fell after the BOJ’s decision to hold interest rates and restart bond buying.

In a surprise for markets, the BOJ said it would continue to buy government bonds at the current pace for now and lay out details of its tapering plan at its July policy meeting.

BOJ governor Kazuo Ueda said the central bank was “paying close attention” to the impact of the weak yen on inflation, and added that a rate hike in July was a possibility, depending on economic data.

The dollar was last up 0.17% at 157.29 , after earlier reaching 158.26, the highest since April 29.

© Reuters. FILE PHOTO: A woman holds Euro banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

The yen’s decline to a 34-year low of 160.245 per dollar at the end of April triggered several rounds of official Japanese intervention totaling 9.79 trillion yen ($62 billion).

In cryptocurrencies, bitcoin fell 1.84% to $65,453.

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BoJ’s announcement will weaken the yen – Julius Baer

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Investing.com – Following the decision by the Japanese monetary authority to maintain interest rates at 0.10%, having previously abandoned the ultra-loose policy with negative rates, the perception with the end of bond purchases later than expected is that the yen will weaken, Julius Baer pointed out in a note Friday. The projection is for a devaluation to 160 , from the current 157.46.

“Bond purchases will now be phased out cautiously and will only begin in July. The end of bond purchases later than expected and unchanged interest rates disappointed and weakened the yen,” pointed out the Swiss group.

David Kohl, chief economist at Julius Baer, ​​says details on how bond purchases will be gradually phased out are expected only at the next meeting, which would have disappointed investors.

“A tightening of policy at the next meeting is now very likely, but will most likely be implemented cautiously,” adds Kohl, who projects a ten basis point rise in rates in July.

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