Most Asian currencies started the week on a low note. This happened because the upcoming week is filled with central bank meetings. Also, a recent solid job report from the world's biggest economy has dampened expectations of an interest rate reduction in June.
The recent employment report released this past Friday revealed that job growth in the US exceeded market predictions. This challenges the idea that the Federal Reserve might soon begin to cut interest rates.
USD strength and Asian currencies
The US dollar index stood strong at 104.33 as of 0720 GMT. Traders now predict a 48.1% likelihood of a rate reduction in June, a decrease from around 60% the previous week, as per the CME FedWatch tool.
It's important to note that a strong US dollar and high UST yields could significantly impact emerging market currencies. This observation was shared by Vishnu Varathan, Mizuho Bank's chief economist for Asia, excluding Japan, in a note to clients.
This week, investors are keenly watching meetings of central banks and inflation updates, particularly from the U.S.
The mood and information in the upcoming week will most likely shape the future of interest rates in Asia. To kick start the week, the central bank in the Philippines will lead on Monday.
The Philippine peso remained stable as the central bank maintained its prime policy rate at 6.5% for the fourth time. Following this, the stock market managed to recover from its earlier losses, however, it still traded slightly lower.
Since May 2022, the central bank has increased the rates by 4.5%, even making an unscheduled rise in October. Thailand, Singapore, and South Korea have their respective central bank meetings this week.
On a different note, Thailand's Prime Minister urged the central bank to lower its interest rate by at least a quarter point in their meeting on April 10. This highlights the ongoing difference in government and central bank views regarding rate cuts.
The Reserve Bank of India decided to keep its lending rate steady at 6.5% last week. The imposed macro-stability risk has led to one significant consequence. Varathan explains that EM (Asia) central banks now find themselves in a more restrictive situation when it comes to the option of cutting rates before the Federal Reserve, particularly with the ever-changing pushback from the Fed's pivot.
Other currencies, such as the Singapore dollar, Malaysian ringgit, South Korean won, and Taiwan dollar, showed little to no change in their trading value.
After a long break, the Chinese markets reopened, with shares dropping by 0.7% and the yuan marginally falling. The Chinese currency dipped to a low unseen for the past 4 and a half months just last week, causing central bank officials to step in. On the other hand, most Asian stocks made gains, as shares in Kuala Lumpur, Taipei, Seoul, and Mumbai saw a rise between 0.1% and 0.7%.
Dollar and yen dynamics
On Monday, the dollar dropped as investors started paying attention to the soon-to-be-announced U.S. inflation data. At the same time, the yen sunk to its lowest value in almost 34 years, causing some to speculate if Japanese authorities would step in to support the falling currency.
Last week, the dollar's movement was affected by changing economic figures. First, there was a drop in the growth of services, followed by solid employment numbers.
These shifts led the markets to lower their predictions for Federal Reserve rate cuts in 2022. Consequently, the dollar index fell by 0.2% to 104.12, and U.S. Treasury yields increased.
The dollar has gained power against the yen - now at 151.76, close to the highest point in 34 years seen last March. This decline was made worse by a drop in real wages in Japan, which affects how people spend money.
Japanese PM Fumio Kishida made a statement on Friday about their readiness to step in and stabilize the yen should the need arise. Amo Sahota, the executive director at Klarity FX, suggested that we should all anticipate more verbal interventions from Japanese officials and a potential action on this matter from the Bank of Japan.