Asian Currencies Firm as Risk Appetite Boosted by US-China Trade Deal

Most Asian currencies firmed on Monday, driven by the United States and China announcing a framework trade deal. The dollar edged lower due to the increasing conviction that the Federal Reserve will cut interest rates this week.

The Japanese Yen Lags Amid Bets of Bank of Japan Interest Rate Hike Delay

The Japanese yen remains on the backfoot as investors bet that the Bank of Japan will delay any further interest rate hikes in light of resistance from new Prime Minister Sanae Takaichi. Strong inflation data provided limited support to the yen, with the USD/JPY pair rising 0.1% and approaching a nine-month high.

The Bank of Japan is set to meet this week, adding to the uncertainty surrounding its monetary policy. Asian currencies drew support from mildly softer-than-expected U.S. inflation data released last week, which fueled speculation about more Federal Reserve rate cuts. This notion also contributed to risk-on moves across broader financial markets.

Chinese Yuan Strengthens as Sino-US Trade Progress Supports

The Chinese yuan’s USD/CNY pair fell 0.1%, with support from a strong midpoint fix by the People’s Bank of China. Washington and Beijing announced over the weekend that they had agreed on a framework trade deal, which will serve as the foundation for negotiations between leaders Donald Trump and Xi Jinping at an upcoming meeting in South Korea.

U.S. and Chinese officials met on the sidelines of the ASEAN summit in Malaysia over the weekend to discuss measures including no more tariff hikes and fewer rare earth export controls. The talks helped alleviate concerns about a quick escalation in U.S.-China trade tensions, which had shaken Asian markets earlier this month.

Regional Market Reaction

Taiwan’s currency firmed on Monday, with the USD/TWD pair down 0.3%. In contrast, the Australian dollar’s AUD/USD pair surged 0.3%, while Singapore’s currency registered a slight decline in the form of the USD/SGD pair falling slightly.

The South Korean won’s USD/KRW pair fell 0.5%, while India’s rupee remained close to its high-87 rupee level due to its USD/INR pair hovering around this benchmark value. The dollar index and dollar index futures experienced a slight decline in Asian trade, following the release of relatively softer-than-expected consumer inflation data.

Fed Rate Cut Odds Boost Risk-On Sentiment

The market consensus is that the Fed will cut rates by 25 basis points at its upcoming meeting this week, with a 99.6% chance priced in as per CME Fedwatch. A lower U.S. interest rate environment bodes poorly for the dollar’s value and instead supports flows into relatively higher-yielding currencies from regions like Asia.

With a Federal Reserve rate cut largely anticipated, investors will be looking closely at guidance provided by Fed Chair Jerome Powell to gauge future rate cut prospects.