The dollar steadied on Wednesday as traders reduced riskier bets in emerging markets while awaiting the Canadian interest rate decision and U.S. services data.
The Swiss franc and yen also benefited from this sentiment, with the yen receiving an additional boost after Bloomberg News reported that the Bank of Japan was likely to consider a reduction in bond buying at its meeting of general policy next week.
The yen fell 0.2% to 155.27 in early trade of the Asian session, and hovered at 168.74 for the euro after jumping 1% on the common currency overnight – its biggest increase since Japan intervened in the foreign exchange markets a month ago.
“We expect there to be further covering of yen short positions ahead of the BOJ’s June 14 policy decision,” Rabobank strategist Jane Foley said in a note to clients.
Japanese real wages fell for the 25th consecutive month in April, data showed on Wednesday, as inflation outpaced nominal wage increases. The yen is the worst-performing currency in the G10 this year, and BOJ Deputy Governor Ryozo Himino said Tuesday that the central bank needs to be “very vigilant” about the impact that currency weakness could have on the economy and inflation.
The Swiss franc rose for the fourth consecutive time against the dollar overnight and, at 0.8902 per dollar, it is on the verge of crossing its 200-day moving average. Other major currencies fell slightly on the dollar even as U.S. bond yields fell.
The euro held steady during the Asian session at $1.0878 and the British pound bought $1.2770, both a bit weaker than they were the previous day. The Australian dollar was a little weaker at $0.6443 as Australian GDP data was due and Westpac forecast annual growth of just 1%, which, excluding the pandemic years, would be the slowest pace since 1991 .
Australia’s top central banker told parliament growth in the March quarter was expected to be weak as high interest rates constrained demand.
The New Zealand dollar was steady at $0.6173, while the Canadian dollar held in the middle of a multi-month range at $1.3678 Canadian dollar per dollar.
Markets are pricing in a 75% chance of a 25 basis point rate cut, which would be the first among G7 countries this cycle, and traders will be watching for signals that further cuts are on the way. future. Data on ISM services and partial employment in the United States are also awaited.
Emerging markets, meanwhile, have had a turbulent few days.
The Indian rupee hit a seven-week low after voters re-elected Narendra Modi by a much smaller margin than expected.
The South African rand wobbled after the African National Congress lost its parliamentary majority for the first time in 30 years.
The Mexican peso, for its part, has fallen more than 4% against the dollar and almost 6% against the yen since the re-election of the left-wing ruling Morena party, which, as part of a coalition, was in passes to obtain a two-thirds majority in both houses of Congress.
According to Chris Weston, head of research at Pepperstone, the sell-off of the peso against the yen showed that investors were exiting one of the most popular carry trades, i.e. those that earn interest , as the outlook for the Mexican currency is uncertain.
“The trigger…was the price that the majority of the Morena party in Congress (means a mandate to advance major structural reforms and see greater government control over business and the economy, a factor that potentially reduces Mexico’s position as an international hub.
