Asia FX muted, dollar edges lower as Fed, BOJ meetings loom

Most Asian currencies moved little in holiday-thinned trade on Monday, while the dollar crept lower as markets awaited a Federal Reserve meeting where the central bank is likely to cut interest rates. 

Regional trading volumes were muted on account of market holidays in Japan, China, and South Korea. But the Japanese yen firmed sharply to an over eight-month high, with a Bank of Japan meeting on tap later this week. Dollar down amid speculation over Fed rate cut 

The dollar index and dollar index futures both fell 0.3% in Asian trade, extending a run of recent losses as markets positioned for a likely interest rate cut this week.

The Fed is widely cut rates at the conclusion of a meeting on Wednesday , although markets are split over just by how much the central bank will reduce rates.

Traders are pricing in a 50% chance for a 50 basis point cut, and a 50% chance for a 25 bps cut, CME Fedwatch showed.

But despite uncertainty over the scale of the cut, the central bank is widely expected to kick off an easing cycle with its September meeting, with analysts forecasting at least 100 bps of rate reductions by end-2024.  Japanese yen at over 8-mth high, BOJ awaited 

The Japanese yen was the best performer among Asian currencies, with the USDJPY pair falling 0.6% to 140.04 yen- its lowest level since early-January. The pair briefly fell below 140 for the first time since 2023. 

Part of the yen’s move was fueled by lower trading volumes in local markets. But traders also piled into the yen before a BOJ meeting on Friday, where the central bank is expected to provide a hawkish outlook for interest rates. 

Japanese consumer inflation due on Friday is also expected to read stronger, which in turn gives the BOJ more impetus to hike interest rates.

The yen was sitting on a strong rally from last week following a string of hawkish comments from BOJ officials, which herald higher rates.

Broader Asian currencies moved little in holiday-thinned trade. The Australian dollar’s AUDUSD pair was an exception, rising 0.4%. The pair is usually regarded as a bellwether for global risk appetite.

The Singapore dollar’s USDSGD pair fell 0.2%, while the Indian rupee’s USDCNY pair fell further below the 84 rupee level. 

The Chinese yuan’s USDCNH pair- the offshore pair- fell slightly, but moved below the 7.1 yuan level. 

Source: Investing.com