US dollar steadies, inflation data boosts Norway’s krone, hurts China’s yuan

THE US dollar steadied on Monday (Jul 10), partly recovering from a knee-jerk reaction to Friday data showing US job gains were the smallest in 2-1/2 years, while disappointing inflation figures in China weighed on the yuan and proxies.

The US dollar index, which tracks the US currency against a basket of major peers, was up 0.13 per cent at 102.4 having fallen 0.87 per cent on Friday after US nonfarm payrolls increased 209,000 in June, missing market expectations for the first time in 15 months.

While details in the employment report reflecting persistently strong wage growth underscored market pricing of a further rate hike later this month, the data helped reassure markets that an end to the Federal Reserve’s programme of rate hikes is at least near, even if once-expected cuts later in 2023 now seem unlikely.

The US dollar’s Friday slide and Monday rebound were broadly based.

The US dollar rose as much as 0.55 per cent against the Japanese yen and was last up 0.06 per cent at 142.31 having slid nearly 1.3 per cent on Friday, and the euro was last down 0.08 per cent at US$1.0953 after a 0.7 per cent Friday jump.

The US dollar/yen pair is particularly sensitive to US bond yields, which paused their recent march higher after the data, as interest rates in Japan are anchored near zero.

“It’s a bit of an unwind from the over-reaction that we saw on Friday. There was an over-reaction to the non-farm payrolls report, so it doesn’t surprise me that the yen’s weakening today,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia.

Sterling was a bigger mover, falling nearly 0.5 per cent on Monday to US$1.2780 having surged 0.79 per cent the previous session to a 15-month high of US$1.2850.

For markets focused on the outlook for central bank policy, particularly the Fed, the focus now turns to US inflation data due on Wednesday, where expectations are for core CPI to have risen 5 per cent on an annual basis in June.

Norway’s krone, the second weakest performing currency in the G10 this year, strengthened after data showed core inflation continued to rise in June and hit a fresh record.

The euro was last down 0.88 per cent against the krone at 11.544, its lowest since mid June.

“The unfavourable trend for core inflation and weak krone will keep pressure on the Norges Bank to deliver another larger 50bps hike at their next policy meeting on Aug 17,” analysts at MUFG wrote in a note, using the currency’s name in Norwegian.

“ More decisive action from the Norges Bank will offer more support for the krone but we are not yet convinced that conditions are in place for a sustainable rebound from deeply undervalued levels.”

The situation is different in China, however, where data on Monday showed China’s factory-gate prices fell at the fastest pace in 7-1/2 years in June and consumer inflation was at its slowest since 2021, fuelling hopes for further support measures from Chinese authorities.

The weak data dragged down the Australian and New Zealand dollars, which are often used as liquid proxies for the Chinese yuan.

The Aussie fell 0.72 per cent to US$0.663, while the New Zealand dollar slid 0.4 per cent to US$0.6185.

The US dollar climbed about 0.1 per cent against the offshore yuan to 7.239.

“The softer CPI is still reflecting weak domestic demand while PPI deflation underscores the strains on factories,” said OCBC currency strategist Christopher Wong.

“(It’s) basically saying that China needs stimulus support.” REUTERS