Category Archives: Forex

LONDON (Reuters) -The dollar hovered near its lowest levels of the year on Tuesday, a day before the expected start to a U.S. easing cycle that markets are wagering may begin with an outsized rate cut.

The euro hovered around $1.1132, not far from the year’s high of $1.1201.

The yen eased to 140.71 after a jaunt to the stronger side of 140 during holiday-thinned trade on Monday.

It has fallen the most this year so has the most room to rally on a dovish turn from the U.S. central bank. A sustained break of 140.00 would open the way to a low from last January at 127.215.

Fed funds futures have rallied to push the chance of a 50 basis point rate cut to 65%, against 30% a week ago. The odds have narrowed sharply after media reports revived the prospect of a more aggressive easing.

“Any sign of weakness in (Tuesday’s U.S. economic data) is only going to reinforce market speculation that there could be a 50 basis points move,” Jane Foley, senior forex strategist at Rabobank, said.

August U.S. retail sales and industrial production figures are expected later on Tuesday, although all eyes are on the Fed’s two-day meeting which concludes on Wednesday.

“Regardless of which of -25bps or -50bps the (Fed) goes with on Wednesday, we do think that the Fed’s messaging will be ‘dovish,'” Macquarie strategists said in a note to clients.

“The USD could weaken against the majors on a very dovish tone, even with a -25bp cut … the largest losses, if any, are still likely to be experienced against the JPY,” they said.

“That’s because the contrast between central bank outlooks will remain starkest between the Fed and the BOJ, for the time being.”

The Bank of Japan is expected to keep policy steady on Friday but signal that further interest rate hikes are coming, perhaps turning the next meeting in October into a live one.

Sterling – the best performing G10 currency this year with a 3.9% rise on the dollar – has also led the charge against the dollar thanks to signs of resilience in Britain’s economy and stickiness in inflation.

It broke above $1.32 on Monday, buying $1.32095 at 1105 GMT. The Bank of England is generally expected to leave rates on hold at 5% when it meets on Thursday, though markets have priced in a 39% chance of another cut.

The Australian and New Zealand dollars bought $0.67555 and $0.6198 respectively after rallying through Monday, as traders focused more on the Fed rather than weekend signs of deepening trouble in China’s sluggish economy.

Chinese markets are closed for the Mid-Autumn Festival break until Wednesday, though the yuan was firm at 7.095 in offshore trade as it settles into a new range.

The held at 100.7, not far from its 2024 low made last month at 100.51.

By Vidya Ranganathan and Samuel Indyk

LONDON (Reuters) -The dollar was lower on Monday while the yen hit its highest level in more than a year, as market participants increasingly expected an oversized rate cut by the Federal Reserve later this week.

The dollar traded at 140.01 yen at 1140 GMT, after falling to as low as 139.58 yen in the session.

This represented a further drop from the 140.285 end-December low it struck on Friday to levels last seen in July 2023.

The Fed’s Sept. 17-18 meeting is the highlight of a busy week that also has the Bank of England and Bank of Japan announcing policy decisions on Thursday and Friday, respectively.

Fed speakers and data releases over the past month have had markets shifting the odds around the size of this week’s rate cut, debating whether the Fed will head off weakness in the labour market with aggressive cuts or take a slower wait-and-see approach.

Futures markets were fully pricing a quarter-point cut from the Fed on Wednesday, with around a 60% chance they opt for a larger 50 basis point move. Last week, the chances of a larger move stood at about 15%.

“It’s all about the Fed and the question about whether it will be a big 50 basis point cut or a smaller 25 basis one,” said Niels Christensen, chief analyst at Nordea. “That’s why the dollar is softer across the board.”

The , which measures the currency against six peers, was down 0.3% to 100.69.

Treasury yields have been falling in the run-up to the highly anticipated Fed meeting, particularly as odds stack up for the Fed to get aggressive with a half-point rate cut.

Benchmark 10-year yields are down 30 basis points in about two weeks. Two-year yields, more closely linked to monetary policy expectations, were around 3.55% and down from roughly 3.94% two weeks ago.

Selling the dollar for yen has been the cleanest trade for investors looking to play the drop in Treasury yields, said Chris Weston, head of research at Australian online broker Pepperstone.

“While speculators are short and riding this lower, this trend is clearly one to align with,” he said.

Investors are also looking to the Bank of Japan’s interest rate decision on Friday, when it is expected to keep its short-term policy rate target steady at 0.25%, having raised rates twice already this year.

BOJ board members have indicated they are keen to see rates higher, and the narrowing gap between rates in Japan and other major currencies has spurred the yen higher and caused billions of dollars worth of yen-funded carry trades to be unwound.

“We are expecting higher rates in Japan and lower rates in the U.S., so the interest rate differential is favouring a stronger yen against the dollar,” Nordea’s Christensen said.

Sterling rose 0.6% to $1.3199. The euro was up 0.4% at $1.1120.

The European Central Bank cut interest rates by 25 bps last week, but ECB President Christine Lagarde dampened expectations for another reduction in borrowing costs next month.

The ECB should almost certainly wait until December before cutting interest rates again to be certain it is not making a policy mistake in easing too quickly, ECB Governing Council member Peter Kazimir said on Monday.

The Bank of England is expected to hold its key interest rate at 5% on Thursday, after kicking off its easing with a 25-bp reduction in August. Futures markets were pricing in around a 38% chance of a quarter-point rate cut on Thursday, versus a 20% chance on Friday.

Bank of Canada Governor Tiff Macklem meanwhile opened the door to stepping up the pace of interest rate cuts, the Financial Times reported on Sunday. The BoC, after keeping its key policy rate at 5%, a more than two-decade high, for a year, has trimmed it by a quarter point three times in a row since June.

The U.S. dollar was little changed against its Canadian counterpart at C$1.3581.

Investing.com — The potential impact of U.S. Federal Reserve rate cuts on the pair is a critical issue for investors and currency strategists, particularly as we approach a possible Fed pivot in 2024. 

With divergent monetary policies between the Fed and the Bank of Japan (BoJ), market participants are divided on whether Fed rate cuts will lead to a weaker USD/JPY. 

As per analysts at BofA, the relationship between Fed rate cuts and USD/JPY is more nuanced, with a variety of structural and macroeconomic factors playing a role.

Contrary to common market expectations, the relationship between Fed rate cuts and a weakening USD/JPY is not a given. 

Historically, USD/JPY did not always decline during Fed easing cycles. The key exception was during the 2007–2008 Global Financial Crisis (GFC), when the unwinding of the yen carry trade caused significant yen appreciation. 

Outside of the GFC, Fed rate cuts, such as those seen during the 1995–1996 and 2001–2003 cycles, did not lead to a major decline in USD/JPY. 

This suggests that the context of the broader economy, particularly in the U.S., plays a crucial role in how USD/JPY reacts to Fed rate moves.

BofA analysts flag a shift in Japan’s capital flows that dampens the likelihood of a sharp JPY appreciation in response to Fed rate cuts. 

Japan’s foreign asset holdings have shifted from foreign bonds to foreign direct investment and equities over the past decade. 

Unlike bond investments, which are highly sensitive to interest rate differentials and the carry trade environment, FDI and equity investments are driven more by long-term growth prospects. 

As a result, even if U.S. interest rates decline, Japanese investors are unlikely to repatriate funds en masse, limiting upward pressure on the yen​.

Moreover, Japan’s demographic challenges have contributed to persistent outward FDI, which has proven to be largely insensitive to U.S. interest rates or exchange rates. 

This ongoing capital outflow is structurally bearish for the yen​. Retail investors in Japan have also increased their foreign equity exposure through investment trusts (Toshins), and this trend is supported by the expanded Nippon Individual Savings Account (NISA) scheme, which encourages long-term investment rather than short-term speculative flows​.

“Without a hard landing in the US economy, Fed rate cuts may not be fundamentally positive for JPY,” the analysts said. 

The risk of a prolonged balance sheet recession in the U.S. remains limited, with the U.S. economy expected to achieve a soft landing. 

In such a scenario, the USD/JPY is likely to remain elevated, especially as Fed rate cuts would likely be gradual and moderate, based on current forecasts. 

The expectation of three 25-basis-point cuts by the end of 2024, rather than the 100+ basis points priced in by the market, further supports the view that USD/JPY could remain strong despite easing U.S. monetary policy.

Japanese life insurers (lifers), who have historically been major participants in foreign bond markets, are another key factor to consider. 

While the high cost of hedging and a bearish yen outlook have led lifers to reduce their hedging ratios, this trend limits the potential for a JPY rally in the event of Fed rate cuts. 

Furthermore, lifers have scaled back their exposure to foreign bonds, with public pension funds driving much of Japan’s outward bond investment. 

These pension funds are less likely to react to short-term market fluctuations, further reducing the likelihood of a yen appreciation​.

While BofA remains constructive on USD/JPY, certain risks could alter the trajectory. A recession in the U.S. would likely lead to a more aggressive series of Fed rate cuts, potentially pushing USD/JPY down to 135 or lower. 

However, this would require a significant deterioration in U.S. economic data, which is not the base case for most analysts. Conversely, if the U.S. economy reaccelerates and inflation pressures persist, USD/JPY could rise further, potentially retesting 160 in 2025​.

The risk from BoJ policy changes is considered less significant. Although the BoJ is gradually normalizing its ultra-loose monetary policy, Japan’s neutral rate remains well below that of the U.S., meaning Fed policy is likely to exert a greater influence on USD/JPY than BoJ moves. 

Additionally, the Japanese economy is more sensitive to changes in the U.S. economy than the reverse, which reinforces the notion that Fed policy will be the dominant driver of USD/JPY.

Investing.com– Asian currencies firmed on Friday, while the dollar retreated as markets bet that the Federal Reserve will kick off an easing cycle from next week, with focus squarely on the scale of a potential interest rate cut. 

The Japanese yen was the best performer among its Asian peers, coming close to its strongest level since early-January amid persistent expectations for a hawkish Bank of Japan. 

Dollar heads for second weekly loss on rate cut bets 

The and were both down 0.3% in Asian trade, extending losses from the prior session. 

The greenback was set for mild weekly losses- its second week in red, as traders stuck to expectations of interest rate cuts despite some strong inflation readings this week.

While the inflation readings initially saw bets shift towards a 25 basis point reduction by the Fed next week, some soft labor market data put bets on a 50 bps reduction back in play. 

Markets are pricing in a 56% chance the Fed will cut rates by 25 basis points next week, along with a 44% chance for a 50 bps reduction, showed. 

The central bank is widely expected to kick off an easing cycle from next week following dovish signals from a slew of Fed officials in recent weeks. Analysts expect at least 100 bps worth of cuts this year from the central bank, with two more meetings left in the year after September. 

Lower rates bode well for risk-driven Asian currencies, given that they free up more liquidity for investing in overseas markets.

Japanese yen near 8-mth peak, hawkish BOJ speak in focus 

The Japanese yen was the best performer in Asia, with the pair falling 0.7% to its lowest level since early-January.

A string of hawkish comments from BOJ officials boosted the currency this week, especially as the called for more interest rate hikes by the central bank. 

While soft producer inflation data slightly undermined this sentiment, a Reuters poll released on Friday showed analysts positioning for a strong reading next week.

The , although analysts are uncertain whether the central bank will hike rates again after a 15 bps raise in late-July. 

Broader Asian currencies rose on the prospect of lower U.S. interest rates, as well as a weaker dollar.

The Australian dollar’s pair added 0.1%, while the Chinese yuan’s pair fell 0.2%.

The South Korean won’s pair fell 0.5%, while the Singapore dollar’s pair fell 0.2%. 

The Indian rupee lagged its peers, with the pair steadying just below 84 rupees. 

Investing.com– Most Asian currencies moved in a flat-to-low range on Thursday, while the dollar firmed as a strong reading on U.S. consumer inflation dashed hopes that the Federal Reserve will cut interest rates by a wide margin.

Soft inflation data from Japan weighed on the yen, pulling the currency further off its strongest levels in eight months. But the yen still remained relatively strong as hawkish comments from the Bank of Japan continue to trickle in.

Barring the yen, most regional currencies were also nursing steep losses from the past week, as heightened fears of a U.S. recession battered risk-driven markets. 

Dollar strong after core CPI beats expectations, dents rate cut bets 

The and both rose 0.1% in Asian trade, extending gains from Wednesday after inflation data read higher than expected for August.

While still eased, the core reading suggested that inflation may prove to be stickier than initially expected, necessitating smaller rate cuts from the Fed.

Bets that the central bank will cut rates only by 25 basis points when it meets next week grew substantially after Wednesday’s data, while bets on a 50 bps cut more than halved, showed. 

But before next week’s Fed meeting, focus is on inflation data due later on Thursday, for more cues on inflation. 

The prospect of smaller rate cuts bodes poorly for Asian markets, given that such a scenario heralds tighter U.S. monetary conditions for longer. 

Japanese yen weakens from 8-mth highs after soft PPI 

The Japanese yen retreated from its strongest levels in eight months, with the pair rising 0.1% to 142.47 yen. 

The yen extended overnight declines after read softer than expected for August.

The softer inflation print raised some questions about just how much headroom the Bank of Japan has to keep raising interest rates, given that the BOJ signaled that it will raise interest rates higher this year on an increase in inflation. 

BOJ board member Naoki Tamura said on Thursday that the bank needed to raise interest rates to at least 1% to avoid inflationary risks.

The central bank is set to , with analysts doubtful over another rate hike after an increase in late-July. data due next week is also set to offer more cues. 

Broader Asian currencies moved in a flat-to-low range, amid uncertainty over U.S. interest rates and a dearth of local cues. 

The Australian dollar’s pair rose 0.1%, while the South Korean won’s pair and the Singapore dollar’s pair were both flat. 

The Chinese yuan’s pair was flat and nursing some losses this week as sentiment towards the country was dented by weak imports data. Reports that U.S. lawmakers were preparing more trade restrictions on Beijing also undermined the yuan.

The Indian rupee’s pair was flat and hovered close to the 84 rupee level. 

 

By Nimesh Vora and Jaspreet Kalra

MUMBAI (Reuters) – Indian importers are exploring options strategies to hedge against currency risks amid muted volatility in the rupee, moving away from outright forwards that have become expensive, traders said.

Premiums, which reflect the interest rate differential between the United States and India, have surged as the Federal Reserve is expected to embark on a rate-cutting cycle, starting next week.

“With forward premiums up significantly, we are recommending to importers to consider option structures,” Samir Lodha, managing director at forex advisory firm QuantArt Market Solutions, said.

The dollar/rupee 1-year forward premium has jumped nearly 75 basis points in the last two months to a 16-month high, making it costlier to hedge future foreign currency payments.

With premiums high and volatility low, using options structures such as capped forwards is recommended, according to QuantArt’s Lodha. The cost of using a capped forwards is about 55%-65% lower than using forwards.

Such structures would, for instance, allow importers to lock in an FX payment due in six months at the dollar/rupee spot rate of 83.96 but the protection would be valid only until 85, Lodha said.

This is where the relative stability of the rupee helps, as the probability of a large depreciation in a short span of time is low.

India’s central bank, which is active on both sides of the forex market – buying and selling dollars, has quashed volatility, making the rupee among the least volatile currencies in Asia.

“Both implied and realised volatility for remain extremely low, leading importers to use option structures such as seagulls, knockouts, and range forwards for better payoff in the current market environment,” Ashhish Vaidya, managing director and treasurer, global financial markets at DBS Bank India, said.

A knockout allows the importer to buy dollars at a better rate than in the forward market, but this benefit ceases if the rupee depreciates past a predetermined level.

“There is no denying that higher premiums are deterring importers from hedging in the forward market”, leading to enquiries for option structures which are low-cost, an FX salesperson at a bank said.

Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.

At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.

“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”

The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.

Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.

That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.

The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar. 

“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.