Asia FX muted as Chinese, Australian economic data disappoints

Investing.com -- Most Asian currencies were muted on Wednesday as weaker-than-expected economic prints from China and Australia soured sentiment towards the region, while anticipation of an upcoming Federal Reserve meeting also weighed.

The Chinese yuan reversed early gains and traded flat after data showed the country's trade surplus sank to a 13-month low in May, driven chiefly by a surprise tumble in exports. The reading showed that overseas demand for Chinese goods remained weak amid worsening economic conditions across the globe, presenting new headwinds for China as it struggles to recover from three years of COVID disruptions.

The Australian dollar was flat as the country’s economy barely grew in the first quarter, amid pressure from high interest rates and inflation.

But the Aussie took some support from comments by Reserve Bank Governor Philip Lowe, who reiterated that local interest rates may need to rise further in order to curb overheated inflation. The RBA had hiked interest rates again on Tuesday, bringing them above 4% for the first time in 12 years.

Most other Asian currencies moved little, given that the prospect of a weak Chinese economy bodes poorly for countries with high exposure to the Asian giant.

The Japanese yen was a clear outperformer for the day, rising 0.3% from near six-month lows as recent losses in the currency spurred speculation that the government could once again intervene in currency markets to support the yen.

A dovish outlook from the Bank of Japan greatly reduced the yen's appeal in a high-yield environment, which had in turn spurred steady intervention through late-2022.

Weak inflation and wage growth readings for recent months spurred more bets that the BOJ will maintain its ultra-loose policy in the near-term.

The Indian rupee moved little ahead of a Reserve Bank meeting this week.

The dollar was flat in Asian trade after a muted overnight session, with the dollar index and dollar index futures moving less than 0.1% in either direction. While weak U.S. economic data spurred some losses in the dollar this week, it remained steady near 11-week highs as markets grew uncertain over a Federal Reserve meeting next week.

Fed Fund futures prices show markets are positioning for a nearly 82% chance the central bank will keep rates steady. But given that recent inflation and labor market data beat expectations, traders remained wary of a potential 25 basis point hike by the Fed.

Still, even if the Fed decides to pause its rate hike cycle, markets see little chances of a rate cut this year, with high interest rates set to weigh on most Asian currencies.