Asian Currencies Struggle for Direction
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- 2 hours ago
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A Report by CYS Global Remit Counterparty Sales & Alliance Unit
USD/SGD | 1.2950 – 1.3015 |
Yen’s Decline Reflects Market Scepticism on Japan’s Fiscal and Monetary Outlook
Asian currencies remained largely rangebound through midweek trading, as investors weighed the implications of Japan’s political transition and the prospect of renewed trade friction between the world’s two largest economies. The Japanese yen has been at the centre of recent volatility, reflecting both policy uncertainty and investor repositioning ahead of critical inflation data.
After firming slightly on Wednesday, the yen resumed its decline on Thursday, with the USD/JPY pair climbing to a nine-day high. The move underscores how markets continue to price in looser fiscal and monetary conditions under new Prime Minister Sanae Takaichi, who was confirmed earlier in the week as Japan’s first female leader.
Takaichi’s long-standing reputation as a fiscal dove—favouring government stimulus and expansive spending—has raised expectations that Tokyo will adopt a more accommodative policy mix. Her stance contrasts with the cautious tone of the Bank of Japan (BOJ), which has been gradually guiding the country away from decades of ultra-loose monetary policy. Market participants view this divergence as a potential drag on the yen, especially if the BOJ delays further rate hikes to accommodate fiscal expansion.
Adding pressure, Japan’s latest trade data showed an unexpected deficit for September, as exports rebounded less than forecast while imports surged. This weak external balance underscores the fragility of Japan’s recovery and may reinforce the need for continued policy support. The upcoming consumer price index (CPI) release on Friday is now seen as pivotal in determining whether the BOJ can justify additional tightening at its late-October meeting.
For now, the yen’s trajectory reflects scepticism that Japan’s inflation momentum is strong enough to support higher rates. Should Friday’s CPI show signs of cooling, the currency could face further depreciation as traders bet on a widening policy gap with the United States.
Broader Asian FX Treads Cautiously Amid U.S. Inflation Watch and Trade Risks
Across the broader region, Asian currencies held mostly flat-to-lower ranges, with traders showing little appetite for risk ahead of major global economic releases. The U.S. dollar remained firm, buoyed by safe-haven flows and a rebound from earlier weakness linked to gold’s sharp price correction.
The dollar index and dollar index futures rose between 0.1% and 0.2% in Thursday’s Asian session, extending gains from earlier in the week. The greenback’s stability was aided by a rout in gold prices, which tumbled from record highs as profit-taking set in. The correction prompted some investors to rotate back into dollar assets, particularly amid persistent uncertainty surrounding the U.S. economy.
The U.S. government shutdown, now stretching into its third week, has complicated the market’s ability to gauge economic momentum. With most official data releases suspended, Friday’s CPI report for September will be the first key data point in weeks—and one that could heavily influence expectations for future Federal Reserve policy. A higher-than-expected reading would likely reinforce the view that the Fed will maintain restrictive rates for longer, providing additional support for the dollar. Conversely, a softer print could weaken the greenback and lift Asian currencies, particularly those with higher carry appeal like the Indonesian rupiah or Philippine peso.
Elsewhere, the Chinese yuan held steady at around 7.124 per dollar after a series of strong midpoint fixes from the People’s Bank of China (PBOC). However, sentiment toward the yuan remains fragile amid escalating geopolitical tensions. Reports that Washington is weighing new export curbs on software-related technologies to China—seen as retaliation for Beijing’s recent rare earth restrictions—rekindled fears of another trade confrontation.
Although U.S. officials later suggested ongoing talks were aimed at avoiding a full-blown trade war, the headlines were enough to sap regional risk appetite. The episode highlights how U.S.-China relations continue to cast a long shadow over Asian markets, with even modest policy signals capable of shifting sentiment.
Risk-Off Mood Deepens as Sanctions, Inflation, and Policy Divergence Shape Outlook
Beyond the trade narrative, geopolitical factors added to the market’s cautious tone. News of fresh U.S. sanctions on Russian oil companies contributed to a broader risk-off mood, prompting investors to seek refuge in the dollar and Treasuries. The move underscores how political and commodity-linked uncertainty continues to interact with monetary themes across Asia.
Regional currency performance reflected these crosscurrents. The South Korean won weakened 0.2% after the Bank of Korea (BOK) kept policy rates unchanged, warning that high property prices and sticky inflation limited room for further easing. The Australian dollar—often seen as a barometer for Asia-Pacific risk sentiment—slipped 0.1%, while the Singapore dollar softened by 0.2% against the U.S. dollar. The Taiwan dollar and Indian rupee also eased slightly, although India drew some attention on reports of progress toward a bilateral trade deal with the U.S. that could substantially lower tariffs from their current 50% level.
The cautious tone across Asian markets underscores a broader shift toward defensive positioning as traders await clarity on both the U.S. and Japan’s inflation trajectories. With monetary policy divergence widening—Japan potentially loosening, the U.S. holding firm, and Korea staying on pause—regional foreign exchange dynamics are likely to remain fluid.
In the short term, markets appear poised for rangebound trading, with the yen and yuan at the centre of attention. The yen’s decline captures a broader narrative of political and policy transition in Japan, while the yuan’s steadiness reflects a managed stability amid external pressures. Should the U.S. CPI surprise on the upside, the dollar could gain further traction at the expense of regional peers. Conversely, any sign of easing inflation or progress in U.S.-China talks could spur a modest rebound across Asia’s currency complex.
Outlook: Policy Clarity Needed for Direction
The coming week promises critical data and policy events that will shape investor sentiment heading into November. Japan’s CPI print, the Bank of Korea’s policy stance, and the U.S. inflation data will together define the tone for Asian currencies.
In the bigger picture, markets remain torn between competing narratives: a U.S. economy losing momentum but still inflation-prone, and an Asia-Pacific region facing uneven recoveries amid fiscal shifts and geopolitical headwinds. Until one of these forces clearly dominates, Asian currencies are likely to remain trapped in narrow ranges—mirroring a market that is waiting, rather than betting, on the next decisive move.
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