Australian dollar set for biggest 1-day drop since March, yen at 3-week low
THE Australian dollar fell sharply on Tuesday (Aug 1) after the Reserve Bank of Australia (RBA) left cash rates unchanged. Meanwhile, the yen fell to a three-week low as the Bank of Japan’s (BOJ) steps last week to tweak its yield curve control (YCC) policy continued to weigh on the currency.
The Australian dollar was set for its sharpest daily drop in a month after the central bank on Tuesday held interest rates at 4.1 per cent for a second month, saying past hikes were cooling demand, but some more tightening might be needed to curb inflation.
The Aussie fell 1.4 per cent to US$0.6626, wiping out the 0.87 per cent gains it clocked in July.
Matt Simpson, senior analyst at City Index, said the Aussie move suggested not everyone was positioned for the RBA’s hold, noting that weaker-than-expected data from China also weighed on the risk-sensitive currency.
“I think it was right that the RBA held today, given trimmed mean inflation and unemployment matched the RBA’s forecasts. And it may have sent a confusing message had they hiked following softer inflation and retail trade data.”
The yen last fetched 142.97, down 0.5 per cent to its lowest in three weeks.
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The Japanese currency has been on a wild ride since Friday, when the BOJ began what may become a slow shift away from decades of massive monetary stimulus. The central bank said it would offer to buy 10-year Japanese government bonds at 1 per cent in fixed-rate operations instead of the previous rate of 0.5 per cent.
“Markets could test just how ‘flexible’ the BOJ will be in the months ahead,” said Carlos Casanova, senior Asia economist at UBP in Hong Kong, adding the subtle changes suggested the BOJ may be gearing up to changing the YCC target in 2023.
The US dollar climbed to a fresh three-week high. This came ahead of a job data release that could give clues on whether the Federal Reserve is set to stick to its monetary tightening plan, while weak economic data in Asia raised global growth fears boosting the safe-haven currency.
On Monday, Fed survey data showed US banks reported tighter credit standards and weaker loan demand from both businesses and consumers in the second quarter, adding to evidence that rising rates are having an impact on the economy.
Against a basket of currencies, the US dollar rose 0.3 per cent to a three-week peak of 102.19 amid signs of weakness in Asian economic activity.
Private surveys showed that Asia’s factory activity shrank in July, as the region’s fragile recovery takes a hit from slowing global growth and weakness in China’s economy.
China’s Caixin/S&P Global manufacturing purchasing managers’ index (PMI) missed analysts’ forecasts and showed the first decline in activity since April.
The euro eased 0.2 per cent to US$1.0975, not too far from an almost three-week low touched on Friday.
Markets are now pricing in a pause in rate hikes by the European Central Bank (ECB), as eurozone inflation fell further in July, and the bloc returned to growth in the second quarter of 2023 with a greater-than-expected expansion.
“Something needs to happen to boost confidence in another 25-basis-point ECB hike, or the positioning will drag euro/dollar down. Unless, of course, the US data this week is bad enough to shift the conversation back to when the Fed will start easing,” said Kit Juckes, chief global FX strategist at Societe Generale.
Sterling fell 0.4 per cent to US$1.2785 following more signs of weakness in the UK economy.
Money markets now see a 60 per cent probability that the Bank of England will hike rates by 25 basis points on Thursday.
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