Kevin Backlund
TOKYO (Reuters) – The yen steadied near a 12-week high against the dollar on Thursday, while Asia-Pacific stock markets recovered from their worst trading day since mid-April.
MSCI’s broadest index of Asia-Pacific shares was down just 0.06% on Friday, following a 1.88% drop the previous day.
Much of the weakness emanated from Taiwan, where the tech-heavy stock index fell 3.53 percent as it reopened after a two-day typhoon-induced shutdown, catching up with the rest of the world’s sell-off since midweek.
The Australian stock index was unable to maintain the previous day’s gains and fell 0.12%, while the Australian stock index rose 0.79% and South Korea’s KOSPI rose 0.89%.
Hong Kong stocks rose 0.21%, while mainland Chinese blue chips were flat.
U.S. stock futures rose 0.43% after two days of selling on the spot index, while Nasdaq futures rose 0.53%.
Pan-European futures rose 0.17%.
US economic data released overnight provided some optimism with better-than-expected second-quarter growth and slowing inflation, easing fears that the expansion could come to an abrupt end and supporting expectations that the Federal Reserve will cut interest rates in September.
Friday’s release of the PCE deflator, one of the Fed’s preferred inflation measures, “will be the next test, and perhaps the climax, of this week’s trading,” said Kyle Rodda, senior market analyst at Capital.com.
“We are concerned about upside risks to the current consensus forecast for the PCE index,” Roda said.
“A small upside surprise would not necessarily derail the return to the inflation target, but it could affect the expected timing of the first (Fed) rate cut and the number of rate cuts over the next six months. This could unsettle markets at a time when sentiment is already somewhat cautious.”
The yen rose 2.5% against the dollar this week.
Demand for the yen as a safe haven cooled overnight, tripping the momentum from a long-running bear market that saw the currency rise about 2.5 percent against the dollar this week, its strongest performance since late April.
The dollar fell to as low as 151.945 yen on Thursday for the first time since May 3, before rebounding by the close to close at 153.67 yen, down 0.19 percent.
IG analyst Tony Sycamore said the area between 152 and 151.80 proved to be a “demand barrier.”
“We expect this support level to hold and we can’t rule out a drop to around 155.30 ahead of the Bank of Japan meeting on Wednesday,” Sycamore said. “After that, it’s all about surprises.”
Both the Bank of Japan and the Federal Reserve will announce their policy decisions on July 31st.
According to LSEG estimates, interest rate futures markets are pricing in a 67.2% probability that Japan’s central bank will raise interest rates by 10 basis points (bps), up from 40% earlier this week.
According to CME’s FedWatch tool, the market sees a slim chance of the Fed cutting rates by at least 25 basis points next week, but a September rate cut is fully priced in.
The yield on the two-year U.S. Treasury note fell slightly during Asian trading hours to 4.4348%, but was still well down from an overnight low of 4.34%, last recorded in early February.
The yield on the 10-year note fell slightly to 4.2445%.
Elsewhere in currency markets, the euro rose 0.13% to $1.0857, while the pound rose 0.11% to $1.2864.
Oil prices rose slightly as better-than-expected U.S. economic data stoked hopes of increased demand for crude from the world’s biggest energy consumer.
September futures rose 12 cents to $82.49 a barrel. U.S. West Texas Intermediate crude oil for September delivery rose 13 cents to $78.41 a barrel.
