As Asian stocks climbed on Tuesday, expectations of the Federal Reserve reducing interest rates dwindled. The dollar strengthened, leaving the yen locked near the 152-per-dollar levels, which had traders concerned about potential intervention. Transitioning from expectations to market actions, the dollar’s firmness underscored the prevailing sentiment.
On Monday, released data indicated that the US manufacturing sector expanded in March for the first time in one and a half years. New orders rose, and production significantly recovered, highlighting the robustness of the economy. These developments raise questions about when the Fed may drop interest rates.
The strong manufacturing statistics raised U.S. Treasury yields, causing the two-year and 10-year yields to reach two-week highs. This also strengthened the value of the dollar.
The MSCI broadest index of Asia-Pacific shares outside of Japan increased by 0.65%. Meanwhile, the Nikkei in Japan closed the day up 0.41%, reclaiming the 40,000 point threshold.
The yen last traded at 151.715 to the dollar, not too far from the 34-year low of 151.975 it hit last week. Traders were keeping a close eye out for any indications that Japanese authorities might step in.
According to Tony Sycamore, an IG market analyst, “the continued run of robust U.S. data is making the lives of Japanese currency officials attempting to support the yen increasingly uncomfortable.”
“It also means that a smoothing event (physical intervention) is unlikely to occur until after the 152.00 level breaks.”
Tokyo made two currency market interventions in 2022 when the yen fell to levels last seen in 1990—152 to the dollar. Tokyo intervened in September and again in October.
On Tuesday, Shunichi Suzuki, Japan’s finance minister, stated that authorities were prepared to respond appropriately to excessive volatility in the currency market. No alternatives were off limits, he emphasized.
Chinese stocks were uneven; the Hang Seng Index (.HSI) in Hong Kong was up more than 2% on Monday as the financial center reopened following a public holiday. The blue chip index (.CSI300) was almost flat.
Monday saw the largest daily increase in Chinese stock prices in a month as the most recent factory activity data suggested that the economy is starting to rebound.
The S&P 500 started the second quarter’s opening session quietly overnight. However, concerns over the timing of rate cuts persisted following the release of better-than-expected manufacturing data, causing Treasury yields to rise. The index recorded its largest quarterly percentage gain in the previous five years.
The yield on 10-year Treasury notes reached a two-week high of 4.337% in the previous session, but it fell 2.4 basis points to 4.305% during Asian hours.
Tuesday saw a 2.5 basis point decline in the yield on the two-year U.S. Treasury, which often tracks interest rate forecasts. This is not too far from the nearly two-week high of 4.726% set in the previous session.
Higher yields generally strengthened the dollar. Consequently, the euro fell 0.11% to $1.0731, while the sterling ended the day at $1.2541, down 0.07%.
The dollar rose 0.038% against a basket of currencies, reaching 105.05, not far from Monday’s four-and-a-half month high of 105.07. This increase came in response to the better-than-expected news.
According to CME FedWatch Tool, markets are currently pricing in a 61% chance of the Fed lowering rates in June, down from 70% a week earlier. In addition, this year’s pricing for cuts is 68 basis points, as opposed to the 75 basis points they predicted last week.
Given that Fed Chair Powell has insisted on reducing policy constraint later this year, markets may have overreacted to the massive ISM manufacturing statistics, according to Standard Chartered’s Asia macro strategist Nicholas Chia.
“If core PCE inflation eases to 2.5%-2.6% by the June meeting, rate cuts could be in play which open the door to mild USD weakness. The risk is that the Fed fails to reach unanimity on cuts, providing another leg up to US yields and the USD.”
Evidence of better demand in the commodities market contributed to a 0.3% rise in U.S. oil to $83.96 per barrel. Simultaneously, escalating tensions in the Middle East pushed Brent up 0.34% on the day to $87.72. At $2,248 per ounce, spot gold fell 0.1% from its all-time high of $2,265.49 on Monday.
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