Forex
Asia FX weak with US inflation in sight; China tariff fears dent yuan
Investing.com– Most Asian currencies moved little on Friday as the dollar steadied from overnight declines, with focus turning squarely towards key U.S. inflation data due next week, which is likely to provide more cues on interest rates.
The Chinese yuan declined, as did currencies with trade exposure to China after multiple reports said that the U.S. was preparing more trade tariffs on Beijing.
Regional currencies took little support from an overnight decline in the dollar, as more signs of a cooling labor market reinforced bets that the Federal Reserve will cut rates in September.
But the dollar steadied in Asian trade, pressuring regional currencies as uncertainty ahead of key U.S. inflation data next week kept traders largely biased towards the greenback.
Chinese yuan weakens, USDCNY up on tariff reports
The Chinese yuan’s pair rose 0.1% as multiple reports said U.S. President Joe Biden was considering imposing fresh sanctions on certain Chinese industries, such as electric vehicles and batteries.
While the economic impact of the tariffs was unclear, such measures could attract retaliation from China, further souring ties between the world’s two biggest economies.
Other currencies with trade exposure to China fell tracking this notion. The Australian dollar’s pair fell 0.2%, while the Singapore dollar’s and the South Korean won’s pairs lost 0.1% and 0.3%, respectively.
Japanese yen remains fragile, USDJPY nears 156
Weakness in the Japanese yen persisted this week, as the pair recouped a bulk of its losses made after the government seemingly intervened in currency markets last week.
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The USDJPY pair rose 0.2% to 155.73 yen, trading well above lows of 152 it had hit earlier in May. Traders now saw 160 yen as the new line in the sand for Japanese government intervention.
Household spending data for March, released earlier on Friday, showed some resilience- a trend that could potentially underpin Japanese inflation expectations.
Dollar steadies, set for weekly gains ahead of inflation data
The and rose slightly in Asian trade, recovering a measure of overnight losses. But the greenback was still trading up about 0.2% for the week.
The greenback fell on Thursday after data showed a bigger-than-expected increase in weekly , furthering expectations of a cooling U.S. labor market.
This reinforced some expectations that the Fed will begin cutting interest rates by September.
But sticky inflation remained a key point of contention for the Fed, with a slew of officials warning as much this week.
Their comments put upcoming data, due next week, squarely in focus for more cues on interest rates.
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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