Feb 6, 2024: Most Asian currencies maintained a narrow range on Friday, while the dollar was on track for a negative week ahead of the U.S. nonfarm payrolls data, which is anticipated to offer insights into the trajectory of U.S. interest rates.
The data release follows the Federal Reserve’s decision to keep interest rates unchanged and dispel expectations for a rate cut in March. However, Fed Chair Jerome Powell struck a somewhat optimistic tone about the U.S. economy, prompting investors to turn to risk-driven assets despite the anticipation of higher interest rates. Consequently, the dollar experienced selling pressure, and the dollar index and dollar index futures were flat in Asian trade on Friday, heading for a weekly loss of about 0.4%.
This trend benefited most Asian currencies, with the Australian dollar, a key risk appetite indicator for Asian markets, rising by 0.4%. The Aussie rebounded from a more than one-month low ahead of the Reserve Bank of Australia’s meeting next week, where the central bank is widely expected to maintain steady interest rates.
Producer and consumer inflation readings in Australia showed that while inflation was easing, it remained above the RBA’s target range.
The Japanese yen remained flat after lagging behind its regional peers in January, but it found some resilience amid growing expectations that the Bank of Japan was nearing a shift away from its ultra-dovish policies in 2024.
The South Korean won rose by 0.2%, supported by data showing consumer inflation slightly below expectations in January, while the Singapore dollar traded sideways.
The Indian rupee was among the stronger performers this week, recovering sharply from near-record lows after the ruling BJP party presented a surprisingly conservative annual budget, signaling a favorable outlook for India’s fiscal deficit.
The Chinese yuan remained flat following a stronger-than-expected midpoint fix from the People’s Bank of China. Yuan losses were restrained by reported intervention in currency markets by the PBOC, responding to a series of underwhelming purchasing managers index readings for January, indicating a lack of improvement in China’s economic recovery at the start of 2024.
As the nonfarm payrolls data approaches, traders are looking ahead to a potential rate cut in May, with the CME FedWatch tool showing over a 60% chance of a May rate cut. Analysts also expect the Fed to cut rates at least four more times after May. The impact of such actions on risk-driven Asian currencies depends on the Fed’s future rate cut plans, which will be influenced by inflation and the labor market, making the upcoming nonfarm payrolls data crucial.