June 3 2024: Most Asian currencies stabilized on Monday, recovering some recent losses against the dollar following in-line inflation data that raised expectations for interest rate cuts and triggered significant declines in the greenback.
The Indian rupee stood out among its peers, surging sharply after exit polls for the 2024 general election indicated a third consecutive victory for the incumbent BJP party.
Expectations of potential interest rate cuts by the European Central Bank and the Bank of Canada this week also led traders to favor risk-driven assets.
However, gains in regional currencies were tempered by ongoing caution regarding U.S. interest rates, especially ahead of key U.S. labor data and an upcoming Federal Reserve meeting.
Dollar Declines After Expected PCE Data
The dollar index and dollar index futures both fell slightly in Asian trade on Monday after experiencing steep losses on Friday.
Losses in the greenback followed the PCE price index data— the Fed’s preferred inflation gauge— which cooled as expected in April, albeit slightly.
This reading spurred some expectations that the Fed will begin cutting rates in September. Traders priced in a 47% chance for a 25 basis point cut in September and a 45% chance for a hold, according to the CME Fedwatch tool.
However, these expectations will be tested in the coming days with key nonfarm payrolls data due this Friday and a Fed meeting next week.
Mixed Performance Among Asian Currencies
Most Asian currencies remained muted due to caution over U.S. interest rates. The Japanese yen’s USDJPY pair hovered above 157, impacted by weaker-than-expected capital spending data. The Australian dollar’s AUDUSD pair fell 0.1%, while the Singapore dollar’s USDSGD pair saw little movement.
The South Korean won’s USDKRW pair fell 0.3%, while the Chinese yuan’s USDCNY pair rose 0.1%. The yuan lagged somewhat behind its peers due to mixed purchasing managers index data. Private PMI data on Monday showed the country’s manufacturing sector expanded in May, contrasting with government PMI data from last week that showed a contraction.
Indian Rupee Strengthens Amid Election Optimism
The Indian rupee emerged as a top performer among its Asian peers on Monday, with the USDINR pair— which measures the number of rupees needed to buy one dollar— dropping 0.5% to 83.059 rupees.
Exit polls indicated that the NDA alliance, led by the BJP, was poised to secure a substantial victory in the 2024 elections, presenting a third consecutive term for Prime Minister Narendra Modi.
Investors have generally welcomed the BJP’s business-friendly policies over the past five years, which have spurred significant growth in the Indian economy.
Focus this week also includes an upcoming meeting of the Reserve Bank of India.
