Asia FX rises on Fed pivot hopes; NZ dollar boosted by hawkish RBNZ

Asia FX rises on Fed pivot hopes; NZ dollar boosted by hawkish RBNZ

The New Zealand dollar was the best performer for the day, rallying nearly 1% after the Reserve Bank of New Zealand kept interest rates on hold, but flagged potential rate increases in 2024 as inflation remained sticky. 

The RBNZ hiked its forecast for peak interest rates in 2024- which saw analysts at Westpac now forecasting a 75% probability of an at least 25 basis point hike in the coming months. 

Broader Asian currencies advanced after Fed officials said in overnight comments that the bank was likely done hiking interest rates, and could even consider an early interest rate cut if inflation falls further.

Traders began pricing in an at least 40% chance the Fed will trim rates by as early as March 2024. Focus was now on PCE price index data- the Fed’s preferred inflation gauge- due later in the week. 

The dollar Index and dollar index futures plummeted following the Fed comments, and fell between 0.1% to 0.2% in Asian trade on Wednesday. The two indicators were also at their weakest level since early-August.

Most Asian currencies logged strong gains on the prospect of a Fed pivot, given that it points to easing pressure on risk-heavy yields. The Japanese yen rose 0.2% to a near two-month high, and moved further away from the 150 level. Focus this week was also on Japanese industrial production and retail sales data, due on Thursday.

But the yen curbed some recent gains after Bank of Japan board member Seiji Adachi said that it was still too early to consider a pivot away from the central bank’s ultra-dovish stance. 

The rate-sensitive South Korean won was flat after rallying 0.8% in overnight trade, while the Malaysian ringgit led gains across Southeast Asian currencies with a 0.6% spike.

The Indian rupee lagged its peers, sticking close to record lows amid pressure from India’s large trade deficit. A spike in oil prices also weighed on the currency. 

The Australian dollar also lagged its peers for the day as data showed consumer price index (CPI) inflation grew less than expected in October, dampening bets on more interest rate hikes by the Reserve Bank of Australia. But CPI still remained well above the RBA’s target range, while core inflation remained sticky. 

The Chinese yuan rose 0.3% following a stronger daily midpoint fix from the People’s Bank of China, briefly touching a five-month high of 7.1201 to the dollar.

While the yuan saw a strong run of gains through November, concerns over a sluggish Chinese economy still persisted, especially after a string of weak economic readings for October. This kept the currency trading above the psychologically important 7 to the dollar level.

Focus this week was on purchasing managers index (PMI) data for November, due on Thursday. The reading is expected to show a sustained decline in manufacturing activity, highlighting continued weakness in China’s biggest economic engines.

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