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Asia FX sinks on weak China GDP, rate-cut doubts; Dollar at 1-mth high

Published 17/01/2024, 05:00
Updated 17/01/2024, 05:00
© Reuters. Most Asian currencies retreated on Wednesday, while the dollar stood at a one-month high amid increasing doubts over early interest rate cuts by the Federal Reserve, while weak Chinese growth data also dented sentiment.

Chinese Q4 GDP misses estimates, economic outlook dim

China’s economy grew slightly less than expected in the fourth quarter, and barely edged past government estimates of 5% for growth in 2023. The reading showed that a post-COVID rebound gained little momentum over the past year, and set a middling tone for China in 2024.

The yuan fell 0.1%, although further losses in the currency were held back by a stronger-than-expected daily midpoint fix by the People’s Bank of China, according to Reuters data.

Other economic indicators for December also pointed to a weak outlook for the Chinese economy. While industrial production and fixed asset investment edged past expectations, Chinese retail sales grew less than expected, while unemployment also unexpectedly rose.

Concerns over China pulled down most currencies with trade exposure to the country. The Australian dollar fell 0.2%, while the South Korean won slid 0.6%.

The Singapore dollar fell 0.2% as data showed the country’s non-oil exports shrank more than expected in December, amid weak Chinese demand.

But the biggest weight on Asian currencies was increasing doubts over early interest rate cuts by the Fed, following somewhat hawkish comments from Governor Christopher Waller on Tuesday.

The Japanese yen was the worst-hit by Waller’s comments, sinking 0.1% on Wednesday after a 1% tumble in overnight trade. The yen also weakened past the 147 level for the first time in more than one month.

The yen was also dented by increasing expectations that the Bank of Japan will maintain its ultra-dovish course when it meets next week. Uncertainty over rebuilding efforts in the wake of a devastating earthquake, coupled with expectations for a middling inflation reading this Friday furthered this notion.

Dollar at one-month high as Waller talks down early rate-cut bets

The dollar index and dollar index futures rose slightly in Asian trade on Wednesday after surging to an over one-month high in overnight trade.

The greenback was boosted chiefly by the Fed’s Waller saying that while interest rate cuts were likely to happen this year, the central bank was not considering any in the near-term, citing continued resilience in the U.S. economy.

Waller’s comments saw traders scaling back bets for a 25 basis point rate cut in March, according to the CME Fedwatch tool. Treasury yields also shot up after his comments, with the 10-year rate breaching 4% once again.

Higher-for-longer rates bode poorly for Asian currencies, given that they diminish the appeal of risk-heavy, high-yielding assets. This notion had battered regional currencies over the past two years, and is expected to remain in play until the Fed signals a timeline for its planned rate cuts.

Focus is now on U.S. retail sales and industrial production data, due later on Wednesday, for more cues on the world's largest economy.

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