Asia FX flat, dollar muted with inflation, economic cues on tap

Investing.com– Most Asian currencies moved little on Tuesday as the dollar tread water in anticipation of key inflation data due later in the day, while the Japanese yen weakened further ahead of more cues on the economy. 

Sentiment towards regional currencies remained constrained after a large risk-off move across markets last week, while an unwinding carry trade with the yen also weighed. 

Uncertainty ahead of more economic signals from China also weighed, amid persistent concerns over a slowdown in the region’s biggest economy.

Dollar steadies with CPI data on tap

The and moved little in Asian trade, extending a sluggish overnight performance as anticipation of the inflation data deterred big bets.

data, due on Wednesday, is expected to show inflation cooled slightly in July- a scenario that gives the Federal Reserve more headroom to begin cutting interest rates. 

Lower rates bode poorly for the dollar. A softer inflation reading could also spark renewed concerns over a U.S. recession, inviting even deeper interest rate cuts from the Fed.

Traders are split over a 25 or 50 basis point cut by the Fed in September, with July’s inflation reading likely to factor into the decision.

Beyond the inflation data, and data is also on tap this week.

Japanese yen weakens further, GDP data awaited 

Weakness in the Japanese yen persisted following some less hawkish statements from the Bank of Japan last week, with the pair rising 0.2% to 147.48 yen.

The pair had fallen as low as 141 yen last week amid increased safe haven demand and an unwinding carry trade. But traders questioned just how much scope there was for the BOJ to hike interest rates further this year.

data showed Japan’s factory inflation grew as expected in July. 

Second-quarter data, which is due on Thursday, is set to factor into the outlook for Japanese rates. Any signs of resilience in the economy, especially amid stronger wages, gives the BOJ more impetus to hike rates- a scenario that bodes well for the yen.

Broader Asian currencies were muted. The Chinese yuan weakened slightly, with the pair rising 0.1%, with and data due later this week.

The Australian dollar was among the few outliers, with the pair strengthening 0.2%. Westpac data showed improved slightly in August. 

The South Korean won’s pair rose 0.1%, while the Singapore dollar’s pair fell slightly. 

The Indian rupee’s pair remained close to record highs, after on Monday showed a sharp decrease in inflation through July.