China’s Yuan Dips on Weak Inflation, Asia FX Muted Before U.S. CPI

By Ambar Warrick

Investing.com-- The Chinese yuan fell slightly on Wednesday after the country logged weaker-than-expected inflation readings for July, while most other Asian currencies tread water in anticipation of key U.S. inflation data.

As of 0030 ET (0430 GMT), the yuan fell 0.1% to 6.7567 against the dollar. China’s consumer price and producer price indexes grew at a slower-than-expected rate in July, showing that the country was still grappling with damaging COVID-19 lockdowns.

Producer price inflation, in particular, slumped to a 17-month low, indicating that factory activity remained severely constrained in the country. This also bodes poorly for other Asian countries that depend on China as a destination for key commodity exports.

The Indonesian rupiah fell 0.2%, while the Australian dollar traded flat. The dollar index was also largely unchanged, as were dollar index futures.

The Indian rupee strengthened slightly on Wednesday as weakness in oil prices looked to potentially reduce India's crude bill. The currency, which rose 0.1% to 79.522, is especially sensitive to oil prices due to India's dependence on crude imports.

The Japanese yen also strengthened slightly to the dollar after the country logged slightly higher than expected producer price inflation in July. Japan's factory output has risen steadily in recent months, despite rising raw material prices and global supply chain issues.

Broader sentiment in Asian currency markets was muted ahead of key U.S. inflation data, due at 0830 ET on Wednesday. The reading, which is expected to have eased slightly to an annual rate of 8.7% in July, is likely to factor into the Federal Reserve’s plans for monetary policy.

But despite retreating slightly, inflation is likely to remain pinned around 40-year highs. This, coupled with strong U.S. payrolls data last week, is expected to give the Fed enough room to hike interest rates further.

Rising U.S. interest rates are negative for Asian markets, given that they reduce the amount of foreign capital that can be invested into the region. The narrowing rate differentials between U.S. and local debt also make investing in the region less attractive.