Asia FX muted, dollar dull as rate-cut bets persist despite sticky CPI

Investing.com-- Most Asian currencies tread water on Friday, while the dollar saw little strength as traders looked to U.S. interest rate cuts this year despite a stronger inflation reading for December.

Some positive data from China also helped sentiment towards the region, as Chinese exports grew more than expected, while consumer price index (CPI) inflation picked up slightly in December.

The Chinese yuan rose 0.1%, while the Australian dollar- which has heavy trade exposure to China, added 0.3%.

The Japanese yen firmed 0.3% after recovering sharply against the dollar on Thursday. Markets still expect the Bank of Japan to reiterate its ultra-dovish stance later this month.

Other data also pointed to sustained weakness in the Japanese economy, with the country’s current account falling more than expected in November.

Dollar steadies, takes little support from stronger CPI

The U.S. dollar took little support from overnight data that showed U.S. CPI inflation grew slightly more than expected in December which, coupled with recent signs of resilience in the labor market, gives the Fed less impetus to begin trimming rates early.

The dollar index and dollar index futures fell 0.1% each in Asian trade after ending Thursday’s session unchanged.

But traders appeared to have increased their bets that the Fed will begin cutting rates by as soon as March, at least according to the CME Fedwatch tool. The tool showed traders pricing in a 70.2% chance for a 25 basis point cut in 2024, up from the 64.7% chance seen a day ago.

Bets for an early rate cut persisted even as several Fed officials pushed back against such expectations, given that inflation remained sticky and well above the central bank’s 2% annual target.

“We are halfway through January, and markets are still pricing in a 70% chance of a March Fed cut. That simply looks wrong,” analysts at ING wrote in a note.

They noted that increased caution over the conflict in the Middle East and the upcoming Taiwan elections may be driving the seemingly abnormal moves in financial markets.

Chinese economic data shows some green shoots

Chinese inflation and trade data signaled some signs of recovery in Asia’s largest economy in December. CPI inflation rose slightly month-on-month, while exports grew more than expected.

But the country still faces an uphill battle in reaching pre-COVID levels of economic activity, as an economic rebound largely failed to materialize in 2023, despite the lifting of anti-COVID measures.

While the yuan rose on Friday, it was still nursing losses from 2023 and the first week of 2024. The currency had weakened in recent sessions despite a series of strong midpoint fixes by the people’s bank.

Focus is now on fourth-quarter Chinese gross domestic product data, due next week, for clearer signals on the economy.

Broader Asian currencies were muted. The South Korean won and Singapore dollar both weakened slightly, while the Indian rupee weakened back above the 83 level against the dollar.

Indian CPI inflation data is also due later on Friday.

The Taiwan dollar was flat before the 2024 presidential elections this Saturday, which are expected set the tone for relations with Beijing over the coming years.

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