Most Asian currencies declined on Tuesday, slightly affected by the weakness of the dollar, as traders remained cautious ahead of further signals regarding US inflation and from the Federal Reserve this week.
Attention was particularly focused on the Chinese yuan, which hovered near its weakest level in four months after intense selling last week, with the measures taken by the People’s Bank of China so far seeming to provide little support for the currency.
The Chinese yuan weakened on Tuesday, despite the People’s Bank of China setting a midpoint stronger than expected, and it was observed directing local banks to buy yuan and sell dollars in the open market.
Recent losses in the yuan were driven by deteriorating sentiment about Chinese economic recovery, while the People’s Bank of China also hinted at further possible interest rate cuts to provide stimulus. Both factors do not bode well for the yuan, which has been one of the worst-performing Asian currencies over the past two years. However, the continued weakness in the yuan could attract more aggressive intervention from the People’s Bank of China, given Beijing’s growing concern about yuan weakness.
On another note, the Japanese yen stabilized on Tuesday, with the US dollar trading against the yen around the 151.30 level. The pair remained close to its highest level in four months. The recent weakness in the yen, despite the Bank of Japan raising interest rates for the first time in 17 years, prompted warnings of potential intervention by the Japanese government, and such warnings, especially comments from Masato Kanda, led to yen stability.
Focus is now on consumer inflation data from Tokyo scheduled for release later in the week. Both the dollar index and futures contracts for the dollar index declined in Asian trading on Tuesday, continuing their losses overnight, as the US currency saw some profit-taking.
However, traders remained heavily biased towards the dollar ahead of major inflation data releases. Consumer Price Index (CPI) data, the preferred inflation gauge of the Federal Reserve, is scheduled for release on Friday, with widespread expectations factoring in the central bank’s interest rate forecasts.
Alongside Personal Consumption Expenditure (PCE) data, speeches from key officials at the Federal Reserve, including Chairman Jerome Powell, will also be closely listened to.
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Shady Fouad is a technical analyst at LDN Company
Shady's strategic vision in the currency markets is reinforced by more than fifteen years of trading experience, which enables him to blend economic and technical analyzes with high efficiency, and find the best investment ideas for traders.
