Asia FX: Yuan Strengthened by China Stimulus Optimism, Aussie Gains Ahead of RBA Meeting

Most Asian currencies saw gains on Tuesday, buoyed by support for the Chinese yuan following Beijing’s announcement of additional stimulus measures. Meanwhile, the Australian dollar appreciated as market participants anticipated hawkish signals from the Reserve Bank.

The regional markets benefited from a weaker U.S. dollar, which remained under pressure after the Federal Reserve’s significant interest rate cut last week. This week, attention is focused on further signals from the Fed and key inflation data.

Sentiment towards regional markets improved as the Chinese government rolled out stimulus measures to boost its struggling economy.

Chinese Yuan Reaches 16-Month High on Stimulus Optimism

The Chinese yuan strengthened on Tuesday, with the currency pair reaching its lowest level since May 2023 after a 0.2% decline. Following the government’s announcement of stimulus measures, including reduced reserve requirements for banks and lower mortgage rates to support the property sector, Chinese markets rallied.

These developments raised hopes for a recovery in China’s economy, which could positively impact the broader region. However, recent economic indicators pointed to a steady slowdown in activities throughout most of the third quarter.

While lower rates may suggest potential weakness for the yuan, government interventions have helped maintain its strength. The offshore yuan also fell by 0.2%, marking a 16-month low.

Australian Dollar Gains Ahead of RBA Meeting

The Australian dollar rose, with the currency pair edging up 0.2% near a peak for 2024. The Reserve Bank of Australia (RBA) is widely expected to hold interest rates steady in its upcoming meeting.

However, persistent inflation and a strong labor market may lead to a hawkish approach from the central bank, suggesting that rates could remain elevated for an extended period. This trend positions the RBA as a unique player among global counterparts and benefits the Australian dollar.

Broader trends showed other Asian currencies firming as well. The Japanese yen stabilized after a sharp decline in overnight trading, influenced by data indicating a consistent drop in manufacturing activity while the services sector continued to expand. The South Korean won experienced a slight decrease.

The dollar index and its futures steadied during Asian trading after a slow start to the week. The Singapore dollar also slipped slightly, and the Indian rupee continued its retreat from record highs.