Asia-Pacific Currencies – Rapid Rise in US Inflation Caps Aussie, Kiwi, Yen Before Fed Stops the Selling
The major Asia-Pacific currencies – Japanese Yen, Australian Dollar, New Zealand Dollar – fell last week, as a rapid rise in U.S. consumer inflation drove Treasury yields and the U.S. Dollar higher on Wednesday. By the end of the week, however, all three currencies rose as Federal Reserve officials played down the impact of higher inflation on monetary policy.
The highlight of the week for the three majors and the U.S. Dollar was the whipsaw buying and selling as investors betting on a rebounding economy squared off against those fearful of inflation.
The U.S. Dollar rose against a basket of major currencies last week with most of the gains coming on Wednesday following a surprisingly strong rise in U.S. consumer prices that drove Treasury yields higher while fanning fears about an increase in inflationary pressure.
Last week, June U.S. Dollar Index futures settled at 90.318, up 0.102 or +0.11%.
U.S. consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints, which fueled financial market fears of a lengthy period of higher inflation.
The news helped widen the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive investment. The rising dollar also weighed on demand for dollar-denominated assets, pressuring commodity-liked currencies like the Aussie and Kiwi.
However, the U.S. Dollar gave back more than half of its earlier-in-the-week gains on Friday, boosting the Japanese Yen, Australian and New Zealand Dollars after U.S. retail sales unexpectedly stalled in April as concerns about prospects of accelerating inflation receded.
Although some dollar bulls see U.S. inflation rising faster than expected as a sign the Fed may have to hike interest rates sooner, central bank policymakers haven’t budged an inch in its stance. The Federal Reserve has been sticking to its script that its stimulus will be in place for some time to support the economy, with officials viewing a spike in inflation as transitory.
Bank of Japan policymakers warned of uncertainties over the country’s economic recovery as pandemic curbs hurt service consumption, a summary of their opinions voiced at an April policy meeting showed last Tuesday.
Last week, the USD/JPY settled at 109.367, up 0.764 or +0.70%.
At last month’s rate review, the central bank kept monetary policy steady and projected that the world’s third-largest economy would recover from the COVID-19 pandemic’s damage. But many in the nine-member board highlighted risks clouding the outlook and stressed the need to focus on supporting the economy with massive stimulus, according to the summary.
Australia promised big spending in a deficit-laden budget last Tuesday as the conservative leadership sought to sustain a recovery from a coronavirus-induced recession and win backing from women and older voters with an eye on the next election.
Last week, the AUD/USD settled at .7783, down 0.0061 or -0.78%.
The government put aside its long-cherished pursuit of a balance budget to bring the economy back to health and the budget papers showed the deficit is forecast to remain close to A$100 billion in the next two fiscal years.
Large deficits are forecast every year until June 2025, the limit of the budget papers’ projections, with the debt load rising during that time to reach almost A$1 trillion.