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Asia FX sinks on Fed, China woes; Aussie slides after RBA

Investing.com– Most Asian currencies fell on Tuesday as a warning from Federal Reserve officials and signs of more economic headwinds for China dented sentiment, while the Australian dollar tumbled after the Reserve Bank struck a seemingly dovish tone.

The U.S. dollar rebounded from six-week lows, firming in Asian trade after Minneapolis Fed President Neel Kashkari cautioned against too much enthusiasm over an end to the Fed’s rate hike cycle.

His comments somewhat dented optimism over a potential end to the Fed’s tightening cycle this year, and saw traders step back from a strong rally in risk-driven assets over the past four sessions. 

This saw Asian currencies reverse a bulk of their recent gains, with the once again weakening past the 150 level to the dollar. The rate-sensitive lost 0.7%, as did the , while the hovered near record lows.

Australian dollar plummets on dovish RBA language 

The was by far the worst performer among its peers, down 0.8% after the Reserve Bank of Australia (RBA) as expected, and signaled a more sticky outlook for inflation.

The hike was driven chiefly by a stronger-than-expected , which reversed a trend of easing inflation seen earlier this year. 

But a change in the RBA’s language- particularly with regards to more rate hikes, saw traders betting that the central bank was done with its rate hike cycle.

Specifically, the RBA offered a more data-driven outlook on future monetary tightening than what it had signaled in the past. Still, Tuesday’s hike put Australian rates at their highest in 12 years. 

Chinese trade data disappoints, yuan down

The fell 0.1% as data showed that China’s shrank more than expected in October, while the country’s narrowed to its weakest level in 17 months.

While unexpectedly rose, weakness in exports signals a continued decline in China’s biggest economic engines- its exporters. A bulk of this decline was driven by worsening demand in the country’s biggest export destinations in the West. 

Weakness in China bodes poorly for broader Asian markets, which depend on the country as a trading hub. Chinese is due later in the week, and is expected to offer more cues on the Asian giant. 

Dollar rebounds as Kashkari warns against Fed pause bets 

The and futures rose 0.2% each in Asian trade, extending an overnight rebound from six-week lows.

Kashkari warned that while the Fed had made some progress against inflation, it still remained well above the central bank’s 2% target- a trend that could attract more rate hikes.

He noted that the U.S. economy had proven to be unexpectedly resilient, which in turn could keep inflation underpinned in the coming months. 

Prior to Kashkari’s comments, markets were pricing in a that the Fed was done with its rate hike cycle, especially following a weak payrolls reading last week. But traders scaled back bets for a Fed pause on Tuesday.

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