Asian currencies traded mixed on Wednesday as the Japanese yen recovered from a two-day decline. Meanwhile, the US dollar remained close to a two-month high ahead of key inflation and labor-market data.
The yen received support from renewed warnings by Japanese officials over excessive currency weakness. Quarter-end flows also helped the currency recover.
At the same time, the Australian dollar slipped below $0.70 after fresh inflation figures came in slightly below expectations.
Yen Rebounds as Intervention Risks Rise
The US dollar index traded near 101.42, while USD/JPY fell about 0.3% to 156.91.
Earlier in the Asian session, the yen had strengthened by as much as 0.6%, briefly pushing USD/JPY down to around 156.38.
The yen was the strongest-performing G10 currency during the session after Japanese officials increased their warnings over excessive depreciation.
Japan’s top currency official, Atsushi Mimura, said the Japanese government and the United States had sent a clear message regarding excessive yen weakness.
Concerns over potential intervention therefore remained an important source of support for the Japanese currency.
Japan Data Could Limit BOJ Rate Expectations
Japan’s latest economic data was weaker than expected.
Retail sales growth slowed in August, while industrial production unexpectedly declined.
Those figures could reduce expectations for faster monetary tightening by the Bank of Japan. However, the threat of currency intervention may continue to limit downside pressure on the yen.
Minutes from the Bank of Japan’s July meeting also showed that policymakers believed underlying inflation was moving closer to the 2% target.
Officials indicated that further interest rate increases could remain appropriate while financial conditions stay relatively accommodative.
Dollar Heads for Strong Monthly Gain
The US dollar remained supported by expectations that interest rates could stay higher for longer.
The Federal Reserve has renewed its focus on controlling inflation, pushing both US rate expectations and Treasury yields higher.
The dollar is heading for its strongest monthly performance since June.
It has gained roughly 2% against the yen in September and close to 3.8% during the third quarter.
Australian Dollar Falls Below $0.70
The Australian dollar weakened after the latest inflation report slightly missed market expectations.
AUD/USD fell around 0.3%, dropping below the $0.70 level for the first time since early August and reaching a nine-week low.
The softer inflation reading reduced expectations for another immediate rate hike from the Reserve Bank of Australia.
However, both headline and underlying inflation remain above the central bank’s target.
RBA Rate Hike Fails to Support Aussie
The decline came just one day after the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.60%, the highest level since 2011.
The RBA warned that inflation risks were becoming more significant and suggested that additional tightening could still be necessary.
Despite the rate increase, the Australian dollar failed to gain lasting support.
Much of the tightening had already been priced into markets. In addition, expectations for further Federal Reserve rate increases, elevated US Treasury yields and weaker risk sentiment reduced the advantage of Australia’s higher interest rates.
US Inflation and Jobs Data in Focus
Investors are now waiting for key US economic data.
The Federal Reserve’s preferred core PCE inflation measure is due later on Wednesday.
However, Friday’s US nonfarm payrolls report is expected to be the more important near-term test for the dollar and interest-rate expectations.
New York Fed President John Williams recently said there was no need to rush another rate increase.
His comments reduced market expectations for an October Fed hike to around 50%, down from approximately 71% previously.
Chinese Yuan Steady as PMI Improves
The Chinese yuan traded broadly unchanged.
China’s official manufacturing PMI rose to 50.1 in September from 49.8, returning to expansion territory.
The non-manufacturing PMI also improved to 50.2.
The yuan is heading for its seventh consecutive quarterly gain against the US dollar ahead of China’s October 1-7 National Day holiday period.
China also warned that it could respond strongly to potential European Union trade restrictions, criticizing them as protectionist measures.
Other Asian Currencies Trade Mixed
Elsewhere in Asian foreign exchange markets, the South Korean won weakened against the dollar, with USD/KRW rising around 0.3%.
USD/INR edged slightly higher, while USD/SGD also posted a modest gain.
The New Zealand dollar slipped around 0.1% to trade near $0.5643.
Overall, Asian currencies remained mixed as investors balanced intervention risks in Japan, softer Australian inflation, improving Chinese data and expectations for upcoming US economic releases.
