Asia FX skittish, dollar at 4-mth low before key inflation data

Most Asian currencies kept to a tight range on Friday, while the dollar hovered around four-month lows as markets awaited more affirmation that the Federal Reserve will cut interest rates earlier in 2024.

Regional units were sitting on some gains this week, while the dollar was set for a second week in red after dovish signals from the Fed saw traders pricing in between three to five rate cuts by the central bank in 2024.

But gains in Asian currencies were held back by uncertainty over the timing of the cuts, especially as several Fed officials pushed back on expectations that monetary easing from the central bank was imminent.

Japanese yen retreats on soft inflation data, BOJ uncertainty persists

The Japanese yen was among the bigger underperformers for the day, falling 0.3% after data showed that inflation eased as expected in November. The currency was also set for a 0.2% weekly loss.

Core consumer price index inflation hit a 16-month low as a cooling Japanese economy saw spending decrease, while easing food prices also helped.

But the inflation reading pointed to lesser pressure on the Bank of Japan to consider pivoting away from its ultra-dovish policy, given that high inflation was a key point of contention for the central bank. November’s readings were still well above the BOJ’s 2% annual target.

While the central bank is still expected to reverse its ultra-dovish stance in 2024, the softer inflation reading brings more uncertainty over the timing of the move. The BOJ offered scant cues on a pivot during its meeting earlier this week, which battered the yen.

Broader Asian currencies traded in a flat-to-low range as traders turned cautious before key U.S. inflation data due later in the day.

The Australian dollar fell 0.3%, retreating slightly from a near five-month high hit in the prior session. The currency was also set to add 1.3% this week, as it benefited from improving risk appetite in the wake of a dovish Fed.

The rate-sensitive South Korean won shed 0.3%, while the Indian rupee remained pinned near record lows of over 83 against the dollar.

The Chinese yuan continued to lag its peers, losing 0.1% Friday and heading for a 0.4% weekly loss. Concerns over a sluggish economic rebound in the country kept traders largely wary of investing in most Chinese assets, with stocks bearing the brunt of this aversion.

Dollar at 4-mth low with PCE inflation in focus

The dollar index and dollar index futures moved little in Asian trade on Friday after sinking to their weakest levels since early-August.

A slight downward revision in third-quarter U.S. GDP saw traders grow more optimistic over interest rate cuts in 2024, although the reading still reflected strong growth in the U.S. economy.

Focus was now squarely on PCE price index data- the Fed’s preferred inflation gauge- due later on Friday. The reading is expected to show persistent stickiness in U.S. inflation- a scenario that gives the Fed more impetus to keep rates higher for longer.

U.S. inflation is still trending well above the Fed’s 2% annual target, with any more signs of stickiness pointing to less dovish measures by the Fed in 2024. Such a scenario could trigger some pullback in Asian currencies, which had a strong run so far in December.

Markets are still positioning for a 25 basis point rate cut in March 2024, according to Fed Fund futures prices.