Most Asian currencies fell on Tuesday as Chinese economic data showed an unexpected contraction in business activity, while the Japanese yen tumbled after the Bank of Japan maintained its ultra-dovish stance.
Investors also remained largely on edge ahead of the conclusion of a Federal Reserve meeting on Wednesday. Both the dollar index and dollar index futures edged higher in Asian trading after posting some overnight losses.
But the greenback still held on to much of its recent gains, with the focus squarely on the Fed. While the central bank is expected to keep rates on hold, it is also likely to reiterate its “higher for longer” stance on interest rates – a scenario that bodes well for the dollar and poorly for the risk-on Asian currencies.
Yen falls as BOJ stays dovish
The Japanese yen slid 0.6% to trade back above 150 after the BOJ kept interest rates negative and made minimal changes to its yield curve control (YCC) policy.
The central bank said it would allow for some more flexibility in its YCC, potentially allowing bond yields to move above their 1% ceiling. However, this largely disappointed markets that were hoping for a more aggressive move from the BOJ.
Benchmark 10-year yields pared some gains after the move, falling further away from the 1% ceiling.
Weak economic data also weighed on the Yen after both industrial production and retail sales disappointed in September.
The BOJ also forecast higher inflation and worsening economic conditions in the coming years, and that it will continue its pace of quantitative easing in the near term.
Chinese Yuan Slightly Lower on Weak PMIs
The Chinese yuan fell slightly as headwinds from disappointing data were somewhat offset by a stronger daily midpoint fix from the People’s Bank of China.
Purchasing Managers’ Index data showed that China’s manufacturing sector contracted in October, while growth in the non-manufacturing sector slowed significantly.
The readings suggested that recent government stimulus measures had provided limited relief to the economy and that more support was needed.
Activity was also affected by deteriorating economic conditions in China’s largest trading partners.
The Australian dollar and South Korean won, both heavily exposed to China, fell 0.5% after the PMI reading. Most of the Southeast Asian units were also down sharply, with the Singapore dollar losing 0.2%.
The Indian rupee was one of the day’s few outliers, trading flat as dollar pressure was offset by a drop in oil prices, which benefited the rupee. However, it remained near record lows.
