Forex
Asia FX weakens as dollar recoups some losses, Indian rupee tests record lows
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Investing.com– Most Asian currencies weakened slightly on Wednesday as the dollar recovered from two-month lows, while the Indian rupee tested record lows after the results of the 2024 general elections showed the ruling BJP party did not sweep as expected.
Broader risk sentiment somewhat improved as weak U.S. data fueled bets that the Federal Reserve will eventually begin cutting interest rates. But traders were wary of piling into risk-driven assets in anticipation of more cues on U.S. rates this week.
The and rose 0.1% each after sinking to two-month lows earlier. Weak data saw traders further their bets that the Federal Reserve will begin trimming rates in September.
But focus this week was squarely on data for definitive cues on the labor market.
Indian rupee volatile, USDINR spikes on election shock
The Indian rupee’s pair, which represents the number of rupees needed to buy one dollar, shot up to a record high of 85 on Wednesday, before sharply curbing its gains amid some perceived intervention by the Reserve Bank of India.
Volatility in the rupee, and broader Indian markets, came after the results of the 2024 general elections showed the ruling BJP party did not sweep as expected. Instead, the party lost a substantial number of seats to the opposing Indian National Congress.
While Prime Minister Narendra Modi is still set for a third term, on the back of the NDA alliance, a weaker majority for the BJP presents difficulties for Modi in enacting more economic reforms.
Japanese yen weakens, but wage data heralds strength
The Japanese yen’s pair rose 0.4% on Wednesday after sinking to an over three-week low in overnight trade.
But the currency was primed for more near-term strength, especially after positive wage growth data for April.
grew 2.1%, as did of employees, with both indicators reflecting the increased wages won by major Japanese labor unions earlier this year.
Strength in wages ties into a more hawkish outlook for the Bank of Japan. The BOJ is expected to scale back some of its asset buying policies at a , which bodes well for the yen.
Broader Asian currencies clocked small moves. The Australian dollar’s pair rose 0.2% even as data showed the economy grew less than expected in the first quarter.
But Reserve Bank of Australia Governor Michele Bullock warned that interest rates could still rise if inflation remained sticky.
The Chinese yuan’s pair rose 0.1%, even as private purchasing managers index data showed the country’s grew more than expected.
The South Korean won’s pair fell 0.2%, while the Singapore dollar’s pair tread water.
Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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