Asia FX fluctuates as Fed caution counterbalances confidence over falling inflation

In expectation of an interest rate increase and other monetary policy hints from the Federal Reserve, most Asian currencies maintained a narrow range on Wednesday, while softer-than-expected U.S. inflation statistics slightly improved sentiment.

The majority of regional units increased on Tuesday due to data showing that U.S. consumer price index (CPI) inflation declined more than anticipated in November, suggesting that inflation has likely peaked.

Gains were constrained, though, as prudence set in ahead of the Federal Reserve’s two-day meeting, which ends on Wednesday. Despite expectations that the central bank will increase interest rates by 50 basis points (bps), attention will be on any potential shifts in the Fed’s aggressive posture toward inflation, given the recent easing of price pressures.

Early signs suggest that the money markets are preparing for a 25 bps increase at the Fed’s next meeting in February 2023.

While the possibility of modest interest rate increases is favorable for Asian currencies, markets are awaiting definitive indications from the Fed regarding such a scenario. This year, rising U.S. rates pummeled regional businesses, and recent hawkish restatements from the Fed have further accelerated this trend.

After hitting a low of more than five months on Tuesday, the dollar started to rise slightly on Wednesday. As a result, the outlook for the dollar index and dollar futures improved by 0.1%, although the possibility of modest interest rate increases in the coming months clouded it.

A four-month high was approached by the Japanese yen, which increased by 0.1%. While the service sector benefited from an economic recovery, data revealed that confidence among key manufacturers deteriorated during the fourth quarter.

Nevertheless, a reading on industrial production in October is anticipated to reveal further deteriorating trends for Japanese firms.

The country’s CPI statistics showed an additional easing in November, which likely portended lower interest rate increases by the Reserve Bank, which caused the Indian rupee to decline by 0.3%. A similar trend is anticipated in the data on wholesale price inflation that will be released later today.

Despite a 0.2% decline, the Chinese yuan maintained its three-month high on expectations that the reversal of anti-COVID policies will fuel the country’s economic rebound. Nevertheless, this week’s data revealed widening economic fractures brought on by COVID-19 problems in the second-largest economy in the world.

Given that they typically benefit the most from slowed U.S. rate hikes, risky Southeast Asian currencies saw significantly higher gains than their peers. For example, the Philippine peso, Indonesian rupiah, and Malaysian ringgit all saw increases of 0.2%, 0.3%, and 0.2%, respectively.

Following news that future rate increases will be incremental and measured, the Thai baht erased some of its early gains. The central bank increased the rates by 25 basis points the previous week.