Introduction:
On Friday, most Asian currencies fell as investors turned cautious ahead of key US labor market data due later in the day. The Japanese yen sank further, remaining at its lowest levels for the year after the Bank of Japan (BOJ) held interest rates at record lows and offered no changes to its ultra-dovish policy ahead of a change in leadership at the bank. The article analyzes the impact of the BOJ’s decision and discusses the outlook for Asian currencies amid fears of more increases in US interest rates.
Impact of BOJ’s Decision:
Friday’s meeting was the last under Governor Haruhiko Kuroda, with economist Kazuo Ueda likely to take over from next month. Ueda has signaled that monetary policy will remain accommodative in the near term, although analysts are predicting an eventual pivot by end-2023. Despite this, the yen remained muted in the near-term due to the BOJ’s dovish stance. Separate data showed that Japanese producer price inflation eased for a second consecutive month, coming in line with the BOJ’s forecast that inflation will ease in the near-term.
Outlook for Asian Currencies:
Broader Asian currencies fell, with most units set for steep weekly losses as fears of more increases in US interest rates battered markets this week. The Singapore dollar, South Korean won, and Taiwan dollar all lost about 0.2% each. The Chinese yuan was flat on Friday, but was set to lose 0.9% this week following weak economic readings from the country. Softer-than-expected trade and inflation data indicated a potentially staggered economic recovery in China, even as the country relaxed most anti-COVID measures earlier this year.
Potential Implications of US Monetary Policy:
Investors are closely watching the US labor market data for February, due later in the day, for more cues on US monetary policy. Any signs of resilience in the jobs market give the Federal Reserve more headroom to raise interest rates. This, coupled with hotter-than-expected inflation, is likely to drive interest rates beyond market expectations, Fed Chair Jerome Powell warned this week. However, higher-than-expected weekly jobless claims saw the dollar retreat against a basket of currencies in overnight trade, amid some hopes that the labor market was cooling. The dollar index and dollar index futures were flat on Friday, hovering just below their strongest levels in three months.
Conclusion:
The BOJ’s decision to maintain its ultra-dovish stance and weak economic readings from China have weighed on Asian currencies, while investors await US labor market data for more clues on US monetary policy. With fears of more increases in US interest rates, the outlook for Asian currencies remains uncertain. Investors will continue to closely monitor US economic data and the Federal Reserve’s policy decisions in the coming months.
