Forex
Asia FX muted, dollar at 3-week high as rate-cut uncertainty persists
© Reuters.
Investing.com– Most Asian currencies kept to a flat-to-low range on Thursday, while uncertainty over the Federal Reserve’s plans for interest rate cuts in 2024 saw the dollar rebound to a three-week high.
The provided little clarity on the bank’s plans for rate cuts this year, which further unsettled risk appetite after a weak start to 2024 for financial markets.
Asian currencies remained particularly sensitive to rate-cut anxiety, after having logged a largely dismal performance in 2023 on headwinds from higher interest rates. While regional currencies saw some relief towards the end of the year, the recovery was now on ice.
The moved little as local markets reopened after an extended new year’s holiday. Purchasing managers index (PMI) data showed that Japanese economic activity remained fragile, as the remained in contraction in December.
Sentiment towards Japan was also dented by a devastating earthquake in central Japan, which killed scores of people and disrupted train lines in the region.
The rose 0.2%, although further gains were held back by showing the country’s service sector remained in contraction in December.
Chinese yuan creeps lower, Fitch downgrades national asset managers
The fell 0.1% on Thursday, with further losses in the currency held back by a substantially stronger-than-expected midpoint fix by the People’s Bank.
Sentiment towards China was dealt a fresh blow by Fitch , and placing three of them on watch for more cuts.
The ratings agency cited increased headwinds for the firms from a property market slump, and also raised concerns over the government’s ability to provide financial support to the four.
The four play a key role in maintaining Chinese lending stability by snapping up non-performing assets from the open market, with their downgrade potentially heralding more headwinds for the Chinese economy.
A private survey showing improved growth in China’s did little to shore up sentiment.
The yuan was also among the worst-performing Asian currencies in 2023, as a post-COVID economic rebound fizzled out, while the PBOC cut interest rates further into record-low territory.
Broader Asian currencies were flat on Thursday, after a largely underwhelming performance in 2023. The traded sideways, while the remained in sight of record lows. PMI data showed India’s grew less than expected in December, but still remained well within in expansion territory.
Dollar rebounds to 3-week high, rate-cut uncertainty in play
The and moved little in Asian trade on Thursday, but remained in sight of a three-week high hit in the prior session.
The greenback marked a sharp recovery from five-month lows hit at the end of 2023, as markets second-guessed the timing of the Fed’s planned interest rate cuts.
The minutes of the Fed’s December meeting provided little clarity on the cuts, as policymakers noted progress against inflation, but still highlighted risks to the American economy.
data due on Friday is also expected to factor into the Fed’s outlook on rate cuts, with the still showing market expectations largely geared towards a 25 basis point reduction in March.
High U.S. interest rates saw Asian currencies log an underwhelming performance in 2023. But this trend is likely to change as the Fed begins trimming rates in 2024.
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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