Asia FX muted as dollar, yield rally cools before inflation data

Most Asian currencies moved little on Friday, but stemmed some recent losses as the dollar came off 10-month highs and Treasury yields stalled before key U.S. inflation data due later in the day.

Regional currencies were battered by a spike in the dollar and Treasury yields this week, after hawkish signals from the Federal Reserve ramped up concerns that U.S. interest rates will remain higher for longer.

A spike in yields also pushed up concerns over a looming recession, given that a sell-off in the bond market usually heralds such an event. Benchmark 10-year yields were at their highest since 2007.

Most risk-heavy assets logged steep losses this week, while the prospect of higher U.S. rates weighed heavily on Asian currencies, as the gap between risky and low-risk yields narrowed.

Market holidays in China and South Korea kept regional trading volumes somewhat limited on Friday.

The offshore yuan firmed slightly, while the South Korean won added 0.1%.

The Indian rupee rose 0.1% after recovering from near record lows in overnight trade. Losses in oil prices also took some pressure off the rupee. An interest rate decision from the Reserve Bank of India, due next week, was in focus.

The Australian dollar was the best performer for the day, rising 0.6% as it recovered from a 10-month low hit this week. Signs of some improvement in private sector credit, after a slump earlier this year, spurred some flows into the Aussie.

Markets were also awaiting a Reserve Bank of Australia meeting next week- the first meeting under new governor Michele Bullock.

Yen weakens after soft inflation, intervention in sight
The Japanese yen hovered above 149 to the dollar, after softer-than-expected Tokyo inflation data dented some expectations that the Bank of Japan will move away from its negative interest rate regime.

Other indicators also painted a mixed picture of Japan’s economy. The unemployment rate unexpectedly rose in August, while industrial production did not shrink as expected. Retail sales grew past expectations in the month.

Markets were focused squarely on any measures by the Japanese government to support the yen, after government officials offered up a series of warnings on betting against the currency.

The yen traded at 10-month lows, and was just a few points shy of levels that had spurred record levels of government intervention in currency markets last year.

Dollar pulls back from 10-mth high, PCE inflation in focus
The dollar index and dollar index futures both fell 0.2% in Asian trade, pulling back slightly from a 10-month high.

Markets were now focused squarely on a personal consumption expenditures reading- the Fed’s preferred inflation gauge- due later in the day, to see whether the central bank had enough impetus to carry out its hawkish outlook.

The bank had warned last week that sticky inflation was likely to elicit one more rate hike this year, and fewer rate cuts in 2024. Such a scenario bodes poorly for Asian currencies.

Beyond the U.S., European consumer price index inflation data was also due on Friday. The euro rose 0.2% against the dollar in Asian trade.