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Asia FX edges past China woes as markets look to less hawkish Fed

Published 12/05/2023, 11:31 PM
© Reuters.
- Most Asian currencies rose slightly on Wednesday as weak U.S. labor data spurred continued bets on early interest rate cuts by the Federal Reserve, helping investors look past persistent concerns over China’s economy.

JOLTs data showed U.S. job openings declined in October, pushing up hopes for a prolonged cooling in the labor market which could limit the space the Fed has to keep rates higher for longer.

The reading pulled down Treasury yields, and comes just a few days before closely-watched nonfarm payrolls data.

Optimism over a less hawkish Fed helped most Asian currencies clock some gains on Wednesday. The Taiwan dollar and South Korean won rose 0.1% each, while the Japanese yen steadied after marking a sharp recovery against the dollar in recent sessions.

The Australian dollar jumped 0.7%, recovering from two days of steep losses even as data showed Australia’s economy grew less than expected in the third quarter, hit chiefly by declining export demand in China. But local demand and spending remained robust.

A less hawkish Reserve Bank was the key source of pressure on the Australian dollar, after the bank kept interest rates on hold on Tuesday and flagged a largely data-driven approach to future hikes.

The Indian rupee remained an outlier among its peers, hovering around record lows of over 83.3 as the country’s massive trade deficit largely offset optimism over stellar economic growth.

Chinese yuan sinks despite govt support as Moody’s warning weighs

The Chinese yuan fell 0.2%, tracking a weaker daily midpoint fix by the People’s Bank of China. But media reports showed that Chinese state-owned banks were selling dollars and buying yuan on the open market to support the Chinese currency.

Sentiment towards China was battered by ratings agency Moody’s, which downgraded the country’s credit outlook to negative and flagged increased economic risks from a property market downturn. Moody’s also said that Beijing needed to roll out more stimulus to shore up economic growth.

The warning came on the heels of several weak economic readings for November, as a post-COVID recovery failed to materialize this year.

Chinese trade data is due on Thursday, and is expected to show persistent weakness in the economy.

Dollar steady as timing of Fed rate cuts remains uncertain

The dollar index and dollar index futures fell 0.1% each in Asian trade, but were trading comfortably above recent lows.

While markets were convinced that the Fed will raise interest rates no further, uncertainty over exactly when the central bank will begin cutting rates in 2024 remained a major point of uncertainty. This notion offered the dollar some support in recent sessions, as did anticipation of Friday's nonfarm payrolls reading.

The U.S. economy remains resilient, which is expected to keep inflation sticky, while the labor market may also take longer to cool than expected.

Traders are pricing in an over 50% chance the Fed will cut rates by as soon as March 2024. But the central bank has largely maintained its higher-for-longer rhetoric.

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