Asia FX dips as bank fears, weak China data keep sentiment dim

By Ambar Warrick

Investing.com -- Asian currencies fell on Monday as persistent fears of a banking crisis kept investors wary of most risk-driven assets, while a weak economic indicator from China also dampened optimism over a recovery in Asia’s largest economy. 

China’s yuan fell 0.2% after data showed industrial profits fell sharply in the first two months of 2023. The reading pointed to a mixed economic recovery in China, and that local manufacturers were struggling despite a rebound in business activity after the relaxing of anti-COVID measures.

Other China-exposed currencies also fell, with the Singapore dollar down 0.2%, while the South Korean won fell 0.3%. A slow economic recovery in China bodes poorly for the Asian countries that depend on Beijing as a major trading partner. 

Focus this week is also on Chinese business activity data for March, due on Friday. The reading is expected to show further improvement after a strong recovery earlier this year. 

Broader Asian currencies retreated amid continued concerns over a banking crisis. The Thai baht was the worst performer among Southeast Asian units, down 0.5%, while the Indian rupee steadied after recent losses.

Deutsche Bank (ETR:DBKGn), Germany’s largest lender, was now in focus after the cost of insuring the bank’s debt against default surged to a near five-year high last week.

The bank’s shares were also sold off heavily, indicating that investors were positioning for a potential credit crunch.

The dollar steadied against a basket of currencies as markets also awaited more cues on U.S. monetary policy in the face of a brewing bank crisis. 

The dollar index and dollar index futures steadied near 103 points.

Comments from Federal Reserve officials over the weekend suggested that the central bank could hike interest rates at least two more times by June. But officials also expressed uncertainty over how much space the bank still has to hike rates, given the increased economic headwinds presented by a banking crash.

While Asian currencies took some support from recent weakness in the dollar, broader gains were limited as traders largely pivoted out of risk-heavy assets and into safe haven such as gold.

The Japanese yen also benefited from safe haven bids, and fell much lesser than other Asian currencies on Monday.