Asia FX firms on US-China trade cheer, dollar lags ahead of Fed meeting

Investing.com-- Most Asian currencies firmed on Monday as risk appetite was boosted by the U.S. and China announcing a framework trade deal, while the dollar edged lower amid increasing conviction that the Federal Reserve will cut interest rates this week. 

The Japanese yen lagged, remaining on the backfoot amid bets that the Bank of Japan will delay any more interest rate hikes in the face of resistance from new Prime Minister Sanae Takaichi, who is expected to dole out more fiscal loosening. Strong inflation data provided little support to the yen, with the USD/JPY pair rising 0.1% and coming close to a nine-month high. 

The Bank of Japan is also set to meet this week. 

Asian currencies took support from mildly softer-than-expected U.S. inflation data released last week, which spurred bets on more Fed rate cuts. This notion also spurred risk-on moves across broader financial markets. 

Chinese yuan firms on Sino-US trade progress 

The Chinese yuan’s USD/CNY pair fell 0.1%, also taking support from a strong midpoint fix from the People’s Bank.

Washington and Beijing said over the weekend that they had agreed to a framework trade deal, which will be built on when leaders Donald Trump and Xi Jinping meet in South Korea later this week. 

U.S. and Chinese officials met on the sidelines of the ASEAN summit in Malaysia over the weekend, and discussed measures including no more tariff hikes and fewer rare earth export controls. 

The talks helped quell concerns over an immediate escalation in U.S.-China trade tensions, which had rattled Asian markets earlier in October. 

The Taiwan dollar also firmed on Monday, with the USD/TWD pair down 0.3%. 

The Australian dollar’s AUD/USD pair surged 0.3%, while the Singapore dollar’s USD/SGD pair fell slightly.

The South Korean won’s USD/KRW pair fell 0.5%, while the Indian rupee’s USD/INR pair hovered around the high-87 rupee level. 

Dollar retreats on soft inflation, Fed meeting awaited 

The dollar index and dollar index futures fell slightly in Asian trade, remaining weak after slightly softer-than-expected consumer inflation data spurred bets on more interest rate cuts.

The print, which was released on Friday, came just days before a Fed meeting this week, where markets widely expect the central bank to cut rates by 25 basis points. Markets are pricing in a 99.6% chance of such a scenario, CME Fedwatch showed. 

Lower U.S. rates stand to dent the dollar and invite more flows into relatively higher-yielding Asian currencies-- a notion that supported regional markets. 

With a Fed rate cut largely priced in, markets will be looking to guidance from Fed Chair Jerome Powell for cues on future rate cuts.