In a significant turn of events, the majority of Asian currencies experienced an upswing on Wednesday, fueled by less hawkish signals from Federal Reserve officials, fostering optimism for an early interest rate cut in 2024 and consequently pushing the dollar to near four-month lows.
The standout performer of the day was the New Zealand dollar, rallying nearly 1% after the Reserve Bank of New Zealand opted to maintain interest rates but hinted at possible rate hikes in 2024, citing persistent inflationary pressures.
The RBNZ revised its forecast for peak interest rates in 2024, prompting analysts at Westpac to project a 75% probability of at least a 25 basis point hike in the coming months.
Asian Currencies Surge, Dollar Approaches 4-Month Low Amid Federal Reserve’s Pivot Talks
Wider Asian currencies experienced notable gains following overnight comments from Federal Reserve officials, indicating a potential halt to interest rate hikes and even a consideration for an early rate cut should inflation continue to decrease.
Traders responded by pricing in at least a 40% chance of the Fed trimming rates as early as March 2024. The focus has now shifted to the upcoming release of the PCE price index data later in the week, which serves as the Fed’s preferred inflation gauge.
The Dollar Index and dollar index futures witnessed a decline of 0.1% to 0.2% in Asian trade on Wednesday, marking their weakest levels since early August.
Most Asian currencies recorded robust gains in anticipation of a Federal Reserve pivot, signaling a potential easing of pressure on yields. The Japanese yen, for instance, rose by 0.2% to nearly a two-month high, distancing itself further from the 150 level. The upcoming data on Japanese industrial production and retail sales on Thursday remains in focus.
However, gains in the yen were tempered after Bank of Japan board member Seiji Adachi expressed that it is premature to consider a shift from the central bank’s ultra-dovish stance.
The South Korean won, sensitive to interest rates, remained stable after a 0.8% rally in overnight trade, while the Malaysian ringgit led gains among Southeast Asian currencies with a 0.6% spike.
The Indian rupee struggled, staying close to record lows due to India’s substantial trade deficit. Elevated oil prices also exerted downward pressure on the currency.
The Australian dollar lagged behind its counterparts as October’s consumer price index (CPI) data revealed lower-than-expected inflation, diminishing expectations for additional interest rate hikes by the Reserve Bank of Australia. Despite this, CPI remained comfortably above the RBA’s target range, with core inflation exhibiting resilience.
Chinese Yuan Strengthens; Attention Shifts to PMI Data
The Chinese yuan saw a 0.3% increase following a more robust daily midpoint fix from the People’s Bank of China, briefly touching a five-month high of 7.1201 against the dollar.
Despite the yuan’s strong performance in November, concerns lingered over a sluggish Chinese economy, amplified by a series of weak economic readings for October, maintaining the currency above the psychologically significant 7-to-the-dollar level.
This week’s focus centers on the release of purchasing managers index (PMI) data for November, scheduled for Thursday. The anticipated reading is expected to underscore a sustained decline in manufacturing activity, underscoring ongoing weaknesses in China’s key economic sectors.