Asia FX sinks on pressure from U.S. yields, weak China inflation

By Ambar Warrick

Investing.com -- Asian currencies retreated on Friday as an overnight spike in U.S. Treasury yields drummed up fears of a looming recession, while the Chinese yuan was pressured by data showing that local inflation rose only slightly after the lifting of anti-COVID curbs.

The Chinese yuan fell 0.3% after data showed consumer price inflation grew less than expected in January, while producer price inflation fell further during the month. The readings painted a somewhat mixed picture of Asia’s largest economy after it relaxed most anti-COVID measures earlier this year.

A staggered economic recovery in China bodes poorly for the rest of Asia, given the country’s place as a dominant trading hub for the region. The reading also raises the prospect of more stimulus measures and interest rate cuts by the Chinese government, which could further dent the yuan this year.

Broader Asian currencies retreated as a spike in short-term Treasury yields ramped up concerns over a potential recession this year. U.S. yield curve inversion - a classic indicator of a recession - also reached its deepest level since the 1980s, further denting sentiment.

Risk-heavy Southeast Asian currencies were the worst performers on Friday, with the Thai baht and Malaysian ringgit losing 0.4% each. A potential U.S. recession is likely to impact sentiment towards risk-heavy Asian markets, potentially cutting off foreign capital inflows.

The dollar advanced against a basket of currencies, and was also set for a strong weekly performance amid increased safe haven demand and hawkish signals from the Federal Reserve. The dollar index and dollar index futures rose 0.1% each, and were up as much as 0.5% for the week.

But markets remained uncertain over the path of U.S. monetary policy, as overnight data indicated some cooling in the jobs market. A rise in weekly jobless claims, coupled with an increasing number of layoffs in the country, is expected to give the Fed less economic headroom to keep raising interest rates.

Focus is now on U.S. inflation data due next week for more cues on the world's largest economy, as it struggles with slowing activity.

The Japanese yen fell 0.1% as data showed producer price inflation eased slightly more than expected in January from the prior month, but still remained close to 40-year highs.

Markets are now watching for the Japanese government's unveiling of its candidates for the next Bank of Japan governor.