Recent inflation data from Canada and Australia have raised concerns about the expected global cycle of monetary easing and could impact Asian and emerging market investments. Wednesday’s report showed a surprise rise in Australia’s inflation rate in May to 4%, shifting expectations from a possible rate cut to an increase within a year.
Following the inflation news, the Australian dollar’s rise was short-lived, as was that of the Canadian dollar, which also rallied after its own inflation data beat expectations earlier in the week. Both currencies ultimately fell against the strengthening US dollar, which hit a two-month peak against a group of major currencies on Wednesday.
The strength of the US dollar, along with rising government bond yields that jumped significantly on Wednesday, is a concern for Asia and emerging markets. A robust US dollar could tighten global financial conditions and shift capital to US assets, potentially at the expense of emerging markets.
In the U.S., Wall Street ended slightly higher, but the performance of the dollar and Treasury yields could have a more pronounced effect on Asian markets on Thursday. The Asia-Pacific economic calendar includes several key releases: Japanese retail sales, Chinese industrial profits, a Philippines interest rate decision and a speech by Andrew Hauser, deputy governor of the Reserve Bank of Australia.
The Philippine central bank is expected to keep its key policy rate at 6.50% for the sixth consecutive time, with forecasts suggesting the first rate cut could come in the final quarter of the year. The Philippine peso has weakened to its lowest point this year against the US dollar, falling 6% year to date.
The Japanese yen also suffered a notable decline, falling to a 38-year low against the dollar on Wednesday. The yen is now trading well below the 160.00 level per dollar. This threshold prompted a significant intervention by the Japanese authorities to buy the yen almost two months ago. Despite the decline in the yen, no action has been taken so far.
Volatility in the dollar/yen exchange rate has increased, with overnight implied volatility posting its biggest jump since mid-May, though it returned to levels seen a day earlier. One-week implied volatility rose the most in four weeks, but also returned to mid-June levels, indicating traders are not yet anticipating aggressive intervention.
Reuters contributed to this article.
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