Asia FX muted; China, Japan currency intervention in focus

© Reuters.

Investing.com-- Most Asian currencies kept to a tight range on Wednesday amid continued fears of higher U.S. interest rates, while recent slumps in the Chinese yuan and Japanese yen saw traders watching for currency market intervention from their respective governments.

The dollar steadied at 10-month highs, with the dollar index and dollar index futures both rising slightly in Asian trade. The currency saw a sharp spat of gains in recent sessions, after the Federal Reserve signaled that interest rates were set to remain higher for longer.

Strength in the dollar, coupled with a spike in Treasury yields, battered most regional currencies in recent weeks, putting them close to annual lows as the gap between risky and low-risk yields narrowed. 

The Indian rupee was among the worst hit, trading just shy of record lows, as the currency also came under pressure from higher oil prices due to India’s large import dependence.

The South Korean won rose 0.3% on Wednesday after sinking to a 10-month low in the prior session, while the Singapore dollar fell 0.1% to its weakest level for the year. 

Losses in the Australian dollar were somewhat offset by data showing consumer inflation accelerated as expected in August, putting some pressure on the Reserve Bank to maintain a hawkish stance.

Japanese intervention in focus as yen nears 150 

The Japanese yen hovered around the 149 level on Wednesday, its weakest level in over 11 months. 

The currency was hit with a new wave of selling after the Bank of Japan maintained its ultra-dovish stance last week, and downplayed expectations for an end to its negative rate regime. The minutes of the BOJ's July meeting, released on Wednesday, also showed a similar stance among policymakers.

Weakness in the yen was followed by a string of warnings from Japanese officials over betting against the currency, indicating that the government was prepared to intervene in currency markets.

While this somewhat helped stem immediate losses in the yen, the Japanese currency still faces mounting pressure from a widening gap between local and U.S. interest rates. 

The Japanese government had carried out record levels of dollar selling in 2022 to support the yen, which had then blown past the 150 level. The currency is now on the cusp of testing those same levels. 

Chinese yuan strengthens on strong data, PBOC seen intervening

The yuan rose 0.1%, taking some support from data that showed China’s industrial profits rebounded sharply in August. 

The yuan was also buoyed by a substantially stronger-than-expected daily midpoint fix by the People’s Bank of China, amid continued efforts by the government to stem further losses in the currency.

Media reports said that the PBOC had instructed state-run banks to sell dollars and lap up excess yuan liquidity- a tactic it has repeatedly carried out this year to support the currency.

But the outlook for the yuan remained clouded by China’s dampened economic prospects, while fears of a renewed property market slump also kept yuan bears healthy. The currency  traded near 10-month lows on Wednesday.