The dollar stabilized on Wednesday as traders scaled back on risky investments in emerging markets, while also awaiting an interest rate decision in Canada 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 is likely to consider reducing bond purchases at its upcoming policy meeting. The yen slightly weakened by 0.2% to 155.27 in early Asian trading, and remained at 168.74 against the euro after experiencing a 1% surge against the common currency overnight – the largest increase since Japan intervened in foreign exchange markets a month ago. Rabobank strategist Jane Foley noted that there is likely to be further short covering of the yen ahead of the BOJ’s policy decision on June 14.
According to data released on Wednesday, Japanese real wages experienced their 25th consecutive monthly decline in April, as inflation continued to outpace nominal pay increases. The yen has been the worst-performing currency among the G10 nations this year, with Deputy Governor Ryozo Himino of the Bank of Japan expressing concerns about the potential impact of the currency’s weakness on the economy and inflation.
During the previous session, the Swiss franc strengthened against the US dollar for the fourth consecutive day, nearing a breakthrough of its 200-day moving average at a rate of 0.8902 per dollar. Despite a decrease in US bond yields, other major currencies saw a slight decline against the dollar.
In the Asian session, the euro remained stable at $1.0878, while sterling weakened slightly to $1.2770 compared to the previous day. The Australian dollar also weakened slightly to $0.6443, as Westpac predicted annual growth of only 1% in Australian GDP, which would be the slowest rate since 1991 when excluding the years affected by the pandemic.
Australia’s central bank governor informed parliament that economic growth in the first quarter is expected to be weak due to high interest rates dampening demand.
The New Zealand dollar remained stable at $0.6173, while the Canadian dollar stayed within its range at C$1.3678 per dollar.
Market expectations indicate a 75% likelihood of a 25 basis point rate cut, which would be the first among G7 nations in this cycle. Traders will be watching for indications of further rate cuts. Additionally, U.S. services ISM and partial jobs data are scheduled for release.
Emerging markets have experienced volatility in recent days. India’s rupee dropped to a seven-week low after Prime Minister Narendra Modi’s party won with a narrower margin than anticipated. South Africa’s rand has also been shaky after the African National Congress lost its parliamentary majority for the first time in 30 years.
Since the re-election of the left-wing Morena party in Mexico and their coalition’s potential two-thirds majority in Congress, the Mexican peso has experienced a significant decline. Against the dollar, it has fallen more than 4%, and against the yen, it has dropped nearly 6%.
According to Chris Weston, the head of research at Pepperstone, this drop in the peso can be attributed to investors pulling back on the popular “carry” trade, which involves earning interest. The uncertainty surrounding the future of Mexico’s currency has prompted heavy selling.
Weston explains that the Morena party’s majority in Congress has sparked concerns about major structural reforms and increased government control over businesses and the economy. These factors could potentially diminish Mexico’s status as an international hub, leading to the negative market reaction.