Asia FX muted, dollar cools as Fed rate hike fears ease

Most Asian currencies kept to a tight range on Monday, while the dollar fell slightly as mixed U.S. jobs data cemented bets that the Federal Reserve will keep rates steady this month, with focus now turning to more economic cues from China.

While nonfarm payrolls data released on Friday read more than expected, the unemployment rate also rose, indicating some cooling in the U.S. labor market. This gives the Fed less headroom to keep raising rates, with markets now almost unanimously pricing in a pause in September.

This notion put some pressure on the dollar on Monday, with the dollar index and dollar index futures falling 0.1% each in Asian trade. But the greenback still remained close to three-month highs.

While the prospect of steady U.S. rates heralds some relief for Asian markets, the Fed is also expected to keep rates higher for longer, limiting any potential gains in regional currencies.

A narrower gap between regional and U.S. interest rates also limits the appeal of Asian markets.

The Japanese yen and South Korean won rose 0.1% each on Monday, as did the Indian rupee.

Chinese yuan flat with stimulus, property market relief in focus
The Chinese yuan steadied in morning trade, supported chiefly by a series of strong daily midpoint fixes from the People’s Bank of China (PBOC).

But the outlook for the yuan remained weak, especially with the PBOC set to reduce interest rates further to stimulate economic activity. Chinese state-owned banks were also seen reducing yuan deposit rates last week, while also loosening mortgage rates.

Still, the PBOC also reduced foreign exchange reserve requirements for local financial firms, increasing dollar liquidity in the country and offering more support to the yuan.

Focus is now chiefly on more stimulus measures from Beijing to support the economy, as well as readings on service sector activity and trade. Sentiment towards China also improved after Country Garden Holdings (HK:2007), the country’s biggest property developer, was able to clinch an extension to its debt obligations, potentially avoiding a default.

Australian dollar firms with RBA pause in focus
The Australian dollar was among the best performers in Asia on Monday, rising 0.3% before a Reserve Bank meeting on Tuesday.

The central bank is widely expected to hold interest rates at an over 10-year high, given recent signs of cooling inflation and employment. The bank is also expected to announce no major policy changes with Deputy Governor Michele Bullock set to take over as Governor after Philip Lowe’s term ends later in September.

A Reuters poll showed that markets are still pricing in the possibility of a rate hike in the fourth quarter, given that inflation still remains relatively high.