Asian Currencies Weaken as Traders Reconsider Early Rate Cuts
Asian Currencies Weaken
Most Asian currencies weakened on Monday, with the dollar steadying at a near two-month high. Strong labor market data and hawkish signals from the Federal Reserve led traders to reconsider bets on early interest rate cuts.
Resilience in Labor Market
Regional currencies were reeling from steep losses on Friday after U.S. data read much higher than expected for January, pointing to continued resilience in the labor market.
Monetary Policy Steady
Federal Reserve Chairman Jerome Powell said in a late-Sunday interview on CBS 60 Minutes that resilience in the U.S. economy gave the Fed more headroom to keep monetary policy steady for the time being. He also flagged a largely data-driven approach to any potential rate cuts.
Impact on Asian Units
This scenario bodes poorly for Asian units, given that high U.S. rates diminish the appeal of high-yield, risk-driven assets.
China Concerns
Persistent concerns over China also dented regional currencies, after a private survey showed activity grew less than expected in January.
Rate Cut Expectations
The dollar showed investors pricing in an even lower chance of a rate cut in March, while traders also slashed expectations for a cut in May. Several analysts said they now only expect the central bank to begin trimming rates by June.
Data from Australia and Japan
The Australian dollar was flat on Monday, supported by data showing the services sector grew more than expected in January. But the yen traded just above a two-month low, having clocked steep losses on Friday as traders looked to higher-for-longer U.S. rates. The Japanese yen was among the few outliers for the day, rising 0.3%, while the yuan tread water before a data release due later this week.
Impact on the Economy
Investors are expecting few positive signals on the Chinese economy, before the week-long Lunar New Year holiday. Meanwhile, Australia’s central bank is amid falling inflation, and traders will be looking out for any cues on the RBA’s plans to begin cutting interest rates this year.
Conclusion
The Asia FX weakened, and the dollar continued to strengthen as traders reassessed their expectations for early rate cuts. Strong labor market data and comments from the Federal Reserve have led to a shift in market sentiment, impacting regional currencies and the outlook for future rate cuts.
