Asia FX weakens, yen slides after election quashes rate hike bets

Most Asian currencies weakened on Monday with the Japanese yen sliding to a three-month low amid bets that the loss of a parliamentary majority for Japan’s ruling party diminished the prospect of higher interest rates in the country. 

Risk appetite was buoyed by Israel launching a less severe strike on Iran than traders were fearing, with oil prices falling sharply on this notion. 

But this translated into limited gains for regional currencies, as growing expectations of smaller U.S. interest rate cuts kept traders biased towards the dollar.  The greenback rose to a near three-month high on Monday. 

Anticipation of several key economic readings this week- from Asia and the U.S.- still kept overall risk appetite subdued.  Japanese yen weakens, USDJPY surges after election upset

The Japanese yen was the worst performer in Asia on Monday, with the USDJPY pair rising 0.9% to 153.68 yen- its highest level since late-July.

The yen was battered by local media reports showing a coalition led by Japan’s ruling Liberal Democratic Party did not win a majority in the parliamentary elections held on Sunday. 

The LDP will now have to seek coalitions with smaller regional parties to retain power- a scenario that presents a more fractured political outlook for Japan. 

Traders bet that increased political uncertainty will keep the Bank of Japan from hiking interest rates further- a scenario that bodes poorly for the yen.

The BOJ is set to meet later this week and is widely expected to keep rates unchanged, after two hikes earlier in 2024. Recent economic readings also showed Japanese private spending and inflation was cooling after an uptick earlier in the year.  Dollar strong, Asia FX drifts lower with econ. data on tap 

Broader Asian currencies mostly weakened, while the dollar rose to near three-month highs before a string of key economic readings this week.

The dollar index and dollar index futures both added 0.3% each. U.S. house price data , gross domestic product data for the third quarter and PCE price index data- the Federal Reserve’s preferred inflation gauge- is due later this week. 

In Asian markets, the Chinese yuan’s USDCNY pair rose 0.2% to an over two-month high. Chinese purchasing managers index x data is due later in the week, and is expected to reflect some effects of the barrage of stimulus measures rolled out by Beijing over the past month. 

The Australian dollar’s AUDUSD pair fell 0.3%, with focus on upcoming consumer inflation data for the third quarter. The South Korean won’s USDKRW pair was flat, while the Singapore dollar’s USDSGD pair rose 0.3%. 

The Indian rupee’s USDINR pair was flat and remained close to record highs above 84 rupees.

Source: Investing.com