The Australian dollar posted a surprise surge in inflation on Wednesday, while the US dollar maintained downward pressure on the yen and yuan as traders awaited the release of US price data at the end of the week.
Australian inflation accelerated to a six-month high in May, which prompted traders to price in the risk of a rate hike and sent the Australian dollar up 0.5% to $0.6678.
“Short-term interest rate markets are at least starting to price in just over a 50% chance of a hike by September, which seems reasonable,” said Rob Carnell, an economist at ING.
A similar surprise in Canadian inflation sent the Canadian dollar briefly soaring to three-week highs as investors scaled back expectations for further cuts.
Elsewhere, the euro was stable at $1.0710 in Asia and the yen, at 159.78 per dollar, put markets on alert for intervention, as this level is a whisker away from the point where the Japanese authorities intervened to buy yen in April.
The New Zealand dollar hovered at $0.6116 and the pound held at $1.2688, with the lack of movement reflecting limited trading ahead of the release of US data.
Citi said this week that its etraders were seeing interbank FX volumes about 40% lower than thirty-day averages.
Markets are banking on Friday’s U.S. data showing that annual growth in the core personal consumption index, favored by the Federal Reserve, slowed to 2.6% in May, the lowest in more than three years, opening the road to rate cuts.
Policymakers, however, continue to signal they are in no rush, with Fed governors Lisa Cook and particularly Michelle Bowman stressing that decisions will depend on data.
“Inflation in the United States remains elevated and I still see a number of upside inflation risks impacting my outlook,” Bowman said.
The yuan has also been crushed by the dollar’s stubborn strength, with China appearing to signal some tolerance for a cheaper currency, gradually weakening the midpoint of the yuan’s daily trading range against the dollar.
The yuan, which has hugged the low side of its range for months, fell to a seven-month low on Wednesday, at 7.2664 per dollar.
“Our expectations for yuan appreciation are postponed to 2025, when we expect the Fed’s easing cycle to consolidate and there is greater confidence in Chinese reflation,” analysts at Bank of America Securities said, forecasting the yuan at 7.45 at the end of the year.
“There should also be greater clarity on the outcome of the US election and its implications for US-China relations,” they added.
