Chinese yuan leads Asia FX higher in anticipation of Fed meeting

© Reuters.

By Ambar Warrick

Investing.com -- The Chinese yuan rose sharply on Monday as local markets reopened from a week-long holiday, while most other Asian currencies strengthened in anticipation of a Federal Reserve meeting and a slew of economic data releases this week.

The yuan rose 0.4%, benefiting from bets that the Lunar New Year holiday will help spur an economic recovery in China. State media reports showed that domestic travel and spending recovered considerably during the past week.

Markets are now awaiting key business activity data from China this week for more cues on whether the economy benefited from the lifting of anti-COVID restrictions. Analyst forecasts see an improvement in both manufacturing and non-manufacturing PMIs, although overall activity is still expected to remain in contraction territory.

Traders are also uncertain over the timing of an economic recovery in China, given that the country is grappling with its worst-yet COVID-19 outbreak.

But an economic recovery in China bodes well for broader Asian markets, given their dependence on the country as a trading partner. Commodity markets such as copper and oil have already risen sharply in recent sessions on expectations of a recovery in Chinese demand.

Broader Asian currencies advanced slightly, while the dollar steadied in anticipation of a Federal Reserve meeting this week. The central bank is widely expected to hike interest rates by 25 basis points.

But focus will be largely on the central bank’s forecast for monetary policy, given that recent data painted a somewhat mixed picture of the U.S. economy.

The dollar index and dollar index futures were flat around 101.9. Focus this week is also on GDP data from the euro zone, as well as U.S. nonfarm payrolls data.

The Japanese yen rose 0.2%, while the Taiwan dollar added 0.3%, rising in tandem with Chinese markets.

The Indian rupee fell 0.2%, having largely lagged its peers in recent sessions as data showed that inflation eased in the country in recent months.

A Reuters poll showed on Monday that the Reserve Bank of India is widely expected to hike interest rates one final time next week before pausing its recent hiking cycle. But such a scenario bodes poorly for the rupee, which is already among the worst-performing Asian currencies of 2022.