20-2-204 (SINGAPORE) The Japanese yen remained near a three-month low against the US dollar on Tuesday as robust US inflation data strengthened the case for sustained higher interest rates. This contrasted with Japan’s recession and market uncertainty surrounding its potential exit from its accommodative monetary policy.
In Asia, the focus shifted to China’s loan prime rate (LPR) decision, with expectations of a reduction in the country’s benchmark mortgage reference rate to boost its slowing economic growth.
Ahead of the announcement, the offshore yuan slightly declined to 7.2143 per dollar.
The dollar currently stands at 150.25 yen, having consistently exceeded the psychological threshold of 150 yen per dollar for six consecutive sessions, prompting concerns from Japanese officials aiming to stabilize the currency.
Last week’s higher-than-expected US producer and consumer prices have tempered market expectations of the Federal Reserve’s interest rate cuts for this year. Futures now indicate a projection of approximately 90 basis points worth of cuts in 2024, down from around 160 bps at the end of last year.
In contrast, Japan’s unexpected recession in the final quarter of 2023, driven by sluggish consumption and capital expenditure, has led investors to reassess the likelihood of a near-term departure by the Bank of Japan (BOJ) from its ultra-loose monetary policy.
Rodrigo Catril, senior currency strategist at National Australia Bank (NAB), remarked, “Currently, the data coming in from Japan indicates that it is not as positive as the BOJ would prefer to see in order to begin moving away from negative interest rates.”
In the wider market, the dollar made slight gains, although trading was muted due to the Presidents’ Day holiday in the United States on Monday.
Against the greenback, the euro declined 0.09% to $1.0770, while the pound dipped 0.06% to $1.2588.
The New Zealand dollar eased 0.11% to $0.6143.
NAB’s Catril stated, “We’re still largely confined within these ranges, awaiting more significant data to push us in either direction. Therefore, data from the US remains crucial.”
In the bond market, US Treasury yields ticked up in response to last week’s inflation data and the adjustment of Fed expectations.
The benchmark 10-year yield increased by about 2 bps to 4.3166%, while the two-year yield remained stable at 4.6565%.
The dollar index, which measures the greenback against major currencies, rose 0.03% to 104.33.
In Australia, the Australian dollar declined by 0.14% to $0.6531.
Minutes from the Reserve Bank of Australia’s February meeting, released on Tuesday, revealed that policymakers had considered raising rates by a quarter-point but ultimately decided to maintain the status quo due to progress made in inflation and a labor market that was loosening more rapidly than anticipated.
