Dollar firms ahead of US inflation data; PBOC clips yuan’s wings

SYDNEY : The dollar was firm on Friday ahead of U.S. inflation figures, which could settle the course of interest rates, while the Chinese yuan was nursing its sharpest drop in months after a nudge lower from authorities triggered a slide.

The euro, seen as vulnerable from U.S. hikes especially if European rate rises lag behind, dropped 0.4per cent overnight and was under pressure in Asia at US$1.1293.

The dollar index, at 96.212, is drifting toward its seventh consecutive weekly rise ahead of the data, which is due at 1330 GMT. Annual price gains of 6.8per cent are expected and any upside surprise will likely be interpreted as a case for a faster Federal Reserve taper and sooner interest rate rises.

Consumer confidence data is also due on Friday and if it holds up could portend even more price pressures ahead.

"Inflation is going accelerate," said Tom Porcelli, RBC Capital Markets’ chief U.S. economist, who thinks the annual pace is going to rise and keep rising to push near 7per cent early in the new year.

"As a result, we think that combination means a hike in March is very possible," he said. "The market is pricing in about a 40per cent chance of that, but we now think it's a bit higher. It's probably closer to a coin flip now."

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The Fed, European Central Bank, Bank of England and Bank of Japan also all meet next week and the combination of the inflation data and the possibility of a central bank response have set market volatility gauges surging.

"Judging by the way the dollar is trading…I'd argue traders are positioning for a higher CPI print which cements a view that the Fed will increase the pace of tapering its QE programme," said Chris Weston, head of research at Pepperstone.

"While form suggests we get a beat, we obviously can't dismiss a poor number, and of course an inline print – I think if we get 6.4per cent or below then AUD/USD should fly."


Volatility has also been stoked by the ebb and flow of concern about the Omicron variant and by policy in China.

A slight rise in the safe-haven yen overnight pointed to persistent caution, although a broad relaxation of concern in earlier sessions has the Aussie dollar up more than 2per cent this week and within sight of its largest weekly rise since August.

The yen was last steady at 113.44 per dollar, just above its 50-day moving average. The Aussie has bounced back hard from 70 cents to hover around US$0.7149. [AUD/]

The yuan, meanwhile, was dunked about half a percent in offshore trade on Thursday to 6.3800 per dollar after the People's Bank of China (PBOC) raised FX reserve requirements for the second time since June.

Analysts said that would encourage yuan selling and cool a rise that has lifted it more than 2per cent against the dollar since late July.

"It also sent a clear signal on PBOC's discomfort on the rapid and continued appreciation of the currency," Goldman Sachs analysts said in a note.

Elsewhere, sterling has been under pressure as England has tightened restrictions to try and curb the spread of the Omicron variant. It last bought US$1.3222.

The New Zealand dollar has actually been weighed down by aggressive hike prospects, with traders expecting that to drag on future growth. It hovered at US$0.6795 in Asia.

Cyrptocurrencies have also copped a bit of a kicking from risk aversion and bitcoin struggled for traction above US$50,000. It was last at US$48,100.

(Reporting by Tom Westbrook; Editing by Sam Holmes)

Artmotion Asia

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