Asian shares inched up ahead of US inflation data: Yen stumbles

Reuters: Asian shares inched up on Tuesday in cautious trading ahead of a crucial U.S. inflation report that could heavily influence the Federal Reserve’s policy outlook, while the fragile yen flirted with one-year lows, putting it back in the intervention zone.

GLOBAL MARKETS: ASIAN SHARES INCHED UP

MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.49% higher, while Tokyo’s Nikkei gained 0.36%. Australia’s S&P/ASX 200 index was up 0.61%. The Japanese yen was at 151.71 per dollar in Asian hours, having touched a one-year low of 151.92 on Monday. If the battered currency breaks below last year’s trough of 151.94, it would mark a fresh 33-year low. Japanese Finance Minister Shunichi Suzuki said on Tuesday that the government would take all possible steps necessary to respond to currency moves, repeating his usual mantra that excessive swings were undesirable.

The U.S. inflation report, due later in the day, has investors’ attention on Tuesday, especially after Federal Reserve Chair Jerome Powell and policymakers have said they are still not sure that interest rates are high enough to tame inflation. Economists polled by Reuters expect headline U.S. consumer price inflation slowed to 3.3% in October from 3.7% in September, with the so-called core inflation rate that strips out volatile components unchanged. “This data holds significant sway over the Federal Reserve’s future policy direction,” said Anderson Alves, a trader with ActivTrades. “A miss, especially in the less volatile core inflation component, might lead traders to believe the Fed could refrain from further hikes. Conversely, a beat could prompt a noticeable repricing on the short-term U.S. interest curve.”

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China shares were higher, with the blue-chip CSI 300 Index gaining 0.40% while Hong Kong’s Hang Seng Index up 0.57%, ahead of a summit between the top leaders from the world’s two largest economies later this week. Benchmark 10-year Treasury yields was up 2.2 basis points at 4.654%, easing a touch from Monday’s one-week peak of 4.696%. Moody’s cut its U.S. AAA credit rating outlook to “negative” from “stable” on Friday, citing large fiscal deficits and a decline in debt affordability. Moody’s decision comes after rival Fitch downgraded the U.S.’s top credit rating in August.

Gary Dugan, CIO at Dalma Capital, said the move underscores the significant structural challenges facing the US economy, characterized by unsustainable levels of debt and fiscal leniency. “With the presidential election just a year away, it’s unlikely that the government will announce significant proposals to address these issues, given the unpopularity of promising spending cuts and tax increases,” Dugan said. The U.S. faces another partial government shutdown beginning Saturday if Congress does not pass a stopgap spending bill.

The yen’s broad decline has traders back to keeping an eye on whether the Japanese authorities will intervene. The currency is down about 14% against the dollar so far this year. The yen had jumped briefly against the dollar in New York hours on Monday after striking the year-to-date low, which analysts attributed to a flurry of trading in options that come due this week. Nicholas Chia, macro strategist at Standard Chartered, said the swings in yen suggests markets are nervous over intervention risks, which also does the job for the authorities to an extent by curbing excessive speculation.

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Japan last intervened in the currency market – selling dollars and buying yen – in October last year. Intervention data released last month showed the authorities have steered clear of further such action since then. The dollar index, which measures the U.S. currency against six rivals, was up 0.057% at 105.69. The index is down 1% in November, on course to snap its three-month winning streak. Oil prices was slightly higher after an OPEC report said market fundamentals remained strong. U.S. crude rose 0.26% to $78.46 per barrel and Brent flat on the day.

U.S. DOLLAR

Reuters: The dollar climbed to its highest level in more than a year against the Japanese yen on Monday, near the key psychological level of 152, before falling sharply in a flurry of trading in $3.45 billion of options that come due this week. The dollar later traded little changed on expectations a soft reading of the U.S. consumer price index on Tuesday will keep Treasury yields trending lower as the market perceives the Federal Reserve is done hiking interest rates. The dollar early in the session shot to 151.92 yen, the highest since October 2022, about 20 minutes before some $1.25 billion in options contracts were set to expire with a 152 strike price, analysts said. The dollar suddenly dropped to 151.20, minutes after a 10 a.m. ET strike price deadline. Another $2.2 billion are set to expire on Wednesday, the analysts said.

The yen’s sharp rebound against the dollar was not due to Bank of Japan intervention, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “The dollar/yen came off after almost reaching last year’s high at 10 a.m.” he said. “The same thing happened in early October.” Markets have been alert to potential intervention from Tokyo to shore up the battered yen. Earlier in Japan, Finance Minister Shunichi Suzuki said the government would keep monitoring the currency market and respond appropriately.

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The dollar was last up 0.12% at 151.680 yen. The yen has fallen almost 14% against the dollar so far this year. Fed Chief Jerome Powell and policymakers want markets to be wary in the hope rates stay high and keep monetary policy tight without the need to raise the Fed’s lending rate further, said Joseph Trevisani, senior analyst at FXStreet.com. “That’s why their rhetoric is much stronger than their actions right now,” Trevisani said. “Rates are going to go down, bond prices are going to go up” if credit markets really think that the Fed is done raising rates, he said. “That’ll take the dollar lower because I do think the Fed is pretty much done raising rates.”

The dollar index, a measure of the U.S. currency against six others, fell 0.09% at 105.64. The reaction to a subdued CPI number is likely to be shallow because U.S. retail sales on Wednesday will be more important as they should better reveal the economy’s strength, said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US in Boston. “All the signs have been pointing to continued momentum on consumption,” Upadhyaya said. “If we see an upside surprise the markets are going to begin to price in a rate hike in December.”

The market barely reacted to news late on Friday that Moody’s cut the outlook for U.S. credit to negative from stable. The euro rose up 0.15% to $ 1.0697 as sterling strengthened after a reshuffle of key posts in the British government by Prime Minister Rishi Sunak. Britain’s currency rose about 0.44% at $1.2279 and about 0.27% firmer against the euro at around 87.14 pence after news of changes to the make-up of the UK government. Sunak brought back former leader David Cameron as foreign minister in a reshuffle triggered by his firing of Interior Minister Suella Braverman after her criticism of the police threatened his authority.

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SOUTH AFRICAN RAND

Reuters: The South African rand edged lower against the dollar on Monday, ahead of several closely watched local and global economic data releases. At 1535 GMT, the rand traded at 18.7625 against the dollar, down 0.12% on its previous close. The dollar last traded around 0.09% stronger against a basket of global currencies. The rand fell more than 2% against the U.S. currency last week, mirroring declines in other emerging market currencies, as hawkish comments by U.S. Federal Reserve Chair Jerome Powell lifted the dollar and dented global risk appetite.

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U.S. inflation data due on Tuesday will be closely watched after Powell said further interest rate hikes may be needed to bring inflation within the bank’s target range. Local investors will look to South Africa’s third-quarter unemployment figures on Tuesday and September retail sales on Wednesday to gauge the health of Africa’s most industrialised economy. On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed up about 0.34%. South Africa’s benchmark 2030 government bond was marginally weaker, the yield up 0.5 basis points at 10.415%.

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BRITISH POUND

FXStreet: GBP/USD trades lower around 1.2270 during the Asian session on Tuesday, snapping a two-day winning streak. The GBP/USD pair faces minor pressure ahead of the employment data from the United Kingdom due to be released later in the day. Bank of England policymakers Huw Pill and Katherine Mann expressed concerns about the potential cumulative effect of higher interest rates in the ongoing battle against persistent inflation. Fearing a deepening recession, they are expected to endorse earlier rate cuts.The market sentiment for the Pound Sterling received a boost as the UK preliminary Gross Domestic Product data showed better-than-expected figures last Friday.

This suggests that the UK may have avoided a recession in 2023. However, the growth outlook remains downbeat, with projections indicating a decline in fresh investments from firms for capacity expansion in the last quarter. This downturn is attributed to weak demand from both domestic and overseas markets. The US Dollar Index struggles to halt losses, bidding around 105.70 at the time of writing. However, the Greenback could cheer the recovery in US Treasury yields. The yield on a 10-year US bond yield improved to 4.65% by the press time.

The anticipation is high as market participants await the upcoming US inflation data set to be unveiled later in the North American session. Projections indicate a rise in the Consumer Price Index for October, albeit at a slower pace. Meanwhile, the forecast for the core annual rate remains stable. If the actual data aligns with these expectations, it could reinforce the market’s belief that the Federal Reserve has completed its interest rate hikes, which in turn, could strengthen the downward pressure on the US Dollar.

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Published by the Mercury Team on 14 November 2023

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