Asia FX muted, dollar ticks lower ahead of more rate-cut cues

Asia FX muted, dollar ticks lower ahead of more rate-cut cues

Regional markets were also pressured by weak risk appetite, as focus remained on any signs of escalation in the Middle East conflict.

The Japanese yen fell 0.2%, amid persistent bets that the Bank of Japan will largely maintain its ultra-dovish policy when it meets later this month. Japanese consumer price index (CPI) data, due later this week, is expected to show a sustained decline in inflation.

The Chinese yuan moved little on Monday, seeing resilience after the People’s Bank of China unexpectedly kept medium-term lending rates unchanged.

The move heralds no changes to the PBOC’s benchmark loan prime rate later in January, offering some strength to the yuan. But no rate cuts also indicate the PBOC has limited headroom to loosen monetary policy further and support the Chinese economy.

Fourth-quarter gross domestic product data, due on Wednesday, is expected to show that the Chinese economy grew more than the government’s 5% target for 2023. But the growth also comes from a low base for comparison from 2022.

Concerns over a slowing post-COVID economic recovery in China weighed on the yuan through the past year, with the currency ranking among the worst-performing Asian units in 2023.

Broader Asian currencies moved in a flat-to-low range, as markets sought more cues on the path of U.S. monetary policy. The Australian dollar rose 0.1%, while the South Korean won fell 0.6%.

The Taiwan dollar was static after the incumbent Democratic Progressive Party (DPP) won the presidential elections over the weekend, securing a third consecutive term in power. But the result also drew ire from China, given that the DPP has constantly voiced support for Taiwan’s independence.

The Indian rupee steadied after recovering from near record lows last week. Indian wholesale price index inflation data is due later on Monday, coming after data on Friday showed a smaller-than-expected increase in CPI inflation.

The dollar index and dollar index futures both fell about 0.1% in Asian trade on Monday, as markets appeared to have largely maintained their expectations of early interest rate cuts by the Federal Reserve.

The CME Fedwatch tool showed traders pricing in a 70% chance for a 25 basis point cut in March, up from the 64% chance seen a week ago.

Bets on early rate cuts were reinforced by data on Friday, which showed producer price index inflation fell more than expected in December. But the report was preceded by data showing a bigger-than-expected rise in CPI inflation in the month.

Focus was now on addresses from a string of Fed officials this week, which are expected to provide more cues on the bank’s plans to cut interest rates this year.

U.S. retail sales data is also due later this week, and is expected to factor into the country’s inflation outlook.

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