Forex
Asia FX muted, dollar steadies with nonfarm payrolls on tap
Investing.com– Most Asian currencies moved in a tight range on Friday as growing risk-aversion in global financial markets sparked some safe haven flows into the dollar, while markets awaited key nonfarm payrolls data for more cues.
The Japanese yen, however, remained steady after a hawkish Bank of Japan sparked a rally in the currency this week, putting it at its strongest levels since late-March. The currency also saw some safe haven bids as a global carry trade continued to come undone.
While global stock markets logged steep losses on concerns over slowing economic growth, losses in foreign exchange markets were limited by the prospect of U.S. interest rate cuts in the coming months. This notion also limited any strength in the dollar.
Yen steady, USDJPY tests 148 on hawkish BOJ
The Japanese yen steadied after a strong rally on Friday, with the pair hovering around 149.50 yen. The pair had fallen as low as 148.88 yen earlier in the day.
The yen surged this week after the BOJ and flagged more potential hikes in 2024, citing some improving trends in the Japanese economy.
Data on Friday showed Japan’s – the change in the total amount of yen in circulation- increased more than expected in July, heralding an uptick in inflation over the coming months.
The BOJ said that inflation was likely to pick up on higher domestic wages- which presents a more hawkish outlook for the central bank this year.
Dollar recovers some losses, nonfarm payrolls on tap
The and steadied in Asian trade after rebounding in overnight trade, as the greenback benefited from safe haven demand.
The dollar was nursing some losses from earlier in the week after the Federal Reserve flagged the possibility of an interest rate cut in September.
Weak economic data furthered bets on a September rate cut, as data showed an outsized contraction in manufacturing activity in June.
Focus was now squarely on upcoming data for more cues on the economy, with any more signs of a cooling labor market likely to further expectations for a rate cut.
Broader Asian currencies moved in a tight range. The Chinese yuan’s pair steadied after logging wild swings this week, although sentiment towards China remained negative as weak PMI data fueled increased concerns over an economic slowdown.
The Australian dollar’s pair rose slightly before a , with soft consumer price index data spurring bets that the central bank will keep interest rates unchanged until at least next year.
But data for the second quarter read slightly higher.
The South Korean won’s pair rose 0.2% despite a slightly stronger-than-expected for July, while the Singapore dollar’s pair was flat.
The Indian rupee’s pair moved little and remained in sight of record highs.
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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