Fundamental Analysis

Asia FX muted, dollar rally cools ahead of econ data deluge

27-Feb-2023 22:57:53

Most Asian currencies moved in a tight range on Tuesday, while the U.S. dollar relinquished some recent gains as markets awaited a barrage of readings this week for more cues on economic growth and monetary policy.

China’s yuan rose 0.2%, faring slightly better than most of its peers following a stronger midpoint fix by the People’s Bank. But the currency was still trading close to the 7 level, a breach of which could bode poorly for the yuan.

Focus this week is on China’s Purchasing Managers’ Index (PMI) for February, which is due on Wednesday. While the data is expected to show that business activity improved from the prior month, China’s vast manufacturing sector is expected to remain close to contraction territory.

The sector is a bellwether for the Chinese economy, and has remained laggard even as the country relaxed most anti-COVID restrictions.

Most China-exposed currencies kept to a tight range on Tuesday, with the South Korean won and the Singapore dollar moving less than 0.1% in either direction.

The dollar steadied against a basket of currencies after logging small losses overnight. The dollar index and dollar index futures rose about 0.1% each on Tuesday.

The two instruments still held close to their highest levels since early-January, amid persistent fears of rising inflation and a hawkish Federal Reserve.

Focus this week is on U.S. PMI data, as well as consumer sentiment and labor market readings for January and the fourth quarter. Any signs of resilience in the U.S. economy give the Fed more economic headroom to keep hiking rates, which is negative for Asian currencies.

Regional units were battered by a sharp rise in U.S. rates in 2022, as the gap between risky and low-risk debt narrowed. This trend is expected to continue in the near-term.

The Australian dollar fell 0.1% on Tuesday, even as data showed the country logged a better-than-expected current account surplus in the December quarter. Focus is now on Australian GDP data for the same period, which is expected to show further cooling in growth on Wednesday.

The Indian rupee fell 0.1% ahead of GDP data for the December quarter due later in the day. While growth is expected to have slowed from the prior quarter, the country is still one of the fastest-growing economies through 2022, helped largely by strong domestic consumption.

The Japanese yen fell 0.1% as data showed industrial production slowed more than expected in January.

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