Asia FX weakens amid China trade jitters; yen rally stalls

Most Asian currencies weakened on Tuesday as new Canadian trade tariffs on China ramped up fears of a trade war, while a rally in the Japanese yen was hampered by some soft inflation data. 

A recovery in the dollar- from 13-month lows- also pressured regional markets, as heightened geopolitical tensions in the Middle East, Libya and Ukraine drove some safe haven demand for the greenback. This trade also limited losses in the yen. 

But persistent expectations of U.S. interest rate cuts still kept traders favoring regional currencies over the dollar, while regional units retained some recent gains.  Yen rally stalls after soft corporate inflation 

The Japanese yen’s USDJPY pair rose 0.1% to 144.78 yen on Tuesday after coming close to 143 yen earlier this week. 

The yen’s rally stalled after corporate services price index - a gauge of producer inflation- read slightly weaker than expected, raising some doubts over how much inflation will pick up this year. 

The currency had rebounded sharply late last week, after Bank of Japan Governor Kazuo Ueda reiterated the central bank’s plans to raise interest rates. Expectations of lower U.S. interest rates also buoyed the yen. 

But the soft inflation data raised questions about how much headroom the BOJ has to keep raising rates. Focus this week is on consumer inflation data on Tokyo , due Friday. Chinese yuan weakens as Canada flags import tariffs

The Chinese yuan’s USDCNY pair rose slightly after Canada said it will impose a 100% import tariff on Chinese electric vehicle imports, following similar measures from the U.S. and Europe.

The country will also impose a 25% tariff on Chinese steel imports.

While EV exports to Canada make up a relatively small portion of Chinese EV sales, Beijing still decried the move. This ramped up concerns over retaliatory tariffs from China, which could in turn spark a renewed trade war with the West.

The tariffs further cloud the outlook for China’s economy, which is already grappling with sluggish growth and deflation. Dollar subdued, rate cut bets persist

The dollar index and dollar index futures both rose marginally in Asian trade, after rising 0.2% from 13-month lows on Monday.

But the outlook for the dollar remained clouded by bets on U.S. interest rate cuts, after dovish signals from the Federal Reserve. This notion presents a brighter outlook for Asian currencies, with traders split over a 25 or 50 basis point cut in September.

But most regional units were muted on Tuesday. The South Korean won’s USDKRW pair rose 0.2%, while the Singapore dollar’s USDSGD pair moved little.

The Australian dollar’s AUDUSD pair rose 0.2%, outperforming its Asian peers on some gains in commodity prices. 

The Indian rupee’s USDINR pair rose 0.1% and was back in sight of record highs. 

Source: Investing.com