Most Asian currencies witnessed a downturn on Monday, as the dollar gained strength and Treasury yields firmed in anticipation of pivotal inflation data from some of the world’s largest economies slated for later in the week.
Despite the substantial losses incurred by the greenback on Friday subsequent to a muddled payrolls report, it regained ground during Asian trading. The prevailing cautious sentiment can be attributed to the impending release of U.S. inflation data. Adding to this, Treasury yields maintained their upward trajectory on Monday, extending gains that were initially triggered by Fitch’s downgrade of the U.S. sovereign rating the previous week.
Both the dollar index and dollar index futures posted modest increases of 0.1% each.
The ascendancy of the dollar exerted downward pressure on a majority of Asian currencies, compounded by apprehensions concerning an impending robust U.S. inflation reading. Forecasts indicate a slight elevation in the Consumer Price Index (CPI) inflation for July compared to the previous month, potentially intensifying the strain on the Federal Reserve to consider interest rate hikes.
July’s projected higher inflation is predicated on elevated oil prices and robust consumer spending.
Chinese Yuan Experiences Decline Preceding Trade and Inflation Figures
The Chinese yuan bore the brunt of the downturn on Monday, plunging by 0.7% against the dollar, despite the People’s Bank of China’s establishment of a daily midpoint at a level stronger than initially expected.
In the upcoming week, attention is also drawn towards Chinese inflation data. While consumer inflation is anticipated to remain subdued for July, producer inflation is predicted to experience further contraction.
Forecasts for trade data, scheduled for Tuesday, indicate a continuous descent in both Chinese exports and imports.
Market focus additionally hones in on signals from the Chinese government concerning strategies to stimulate economic growth. This comes after officials divulged limited specifics about their intended expenditure measures. Analysts warn that any expansionary measures to foster economic growth may escalate China’s fiscal outlay and escalate government debt.
The broader spectrum of Asian currencies exhibited a retreat, exemplified by a 0.1% decline in the South Korean won and a 0.3% dip in the Japanese yen, despite certain Bank of Japan members’ alerts that inflation might surpass expectations during the current year.
The potential for elevated inflation places pressure on the Bank of Japan to potentially recalibrate its ultra-accommodative approach, a shift that is anticipated to work to the advantage of the yen.
Meanwhile, the Australian dollar experienced a marginal uptick, whereas the Indian rupee experienced a minor depreciation ahead of a Reserve Bank meeting scheduled for this week. The RBI is widely anticipated to maintain the status quo on interest rates until March 2024.