Most Asian currencies edged lower ahead of a series of economic and political events on Thursday, as investors braced for the possibility of extreme moves in the market. Three key events - UK elections, a European Central Bank policy meeting and testimony by former FBI director James Comey - are all set for Thursday. "We saw a mild version of risk aversion as traders prepare for the big macro events at the back end of the week." said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
Safe havens such as gold and sovereign debt were preferred by investors. The Japanese yen inched down against the dollar on the day, hovering near the 1-1/2-month high hit on Tuesday.
"Safe haven demand for the JPY may also increase ahead of 'Super Thursday', particularly that of the UK elections of which the outcome has become more uncertain," Bank of Tokyo-Mitsubishi UFJ said in a research note. UK polls have been mixed suggesting outcomes ranging from a majority for Prime Minister Theresa May's party to a 'hung' parliament in which no party has an overall majority. Lingering unease over the isolation of Qatar by a number of its Middle East neighbours, in protest at what they say is the Gulf nation's support for terrorism, also kept investors on the sidelines.
With a fall of nearly half a percent, the South Korean won was the worst performer in the region, tracking the weak domestic equities market. Meanwhile, stronger guidance by the People's Bank of China, setting its midpoint fixing at a fresh 7-month high, could not prevent the yuan's fall as strong corporate demand for the dollar undermined the local currency. The market is anxiously waiting for China's May foreign exchange reserves data, due later on Wednesday, for clues on the authorities' efforts to stem capital outflows.
"There has been a pick-up in capital outflows over the last two months and another increase in outflows during May would be consistent with the pick-up in FX intervention," Sue Trinh, head of Asia FX strategy at Royal Bank of Canada, said in a report.
Analysts expect the Thursday events to bring some volatility to Asian currencies as their volatilities have fallen to multi-month lows recently. The 10-day volatility of the South Korean won stood at 5.46 percent, the lowest in 32 months, while Taiwan dollar volatility at 5.7 percent was the lowest in seven months. The Indian rupee was trading flat ahead of the central bank policy meeting on Wednesday. Analysts expect a less hawkish tone from the central bank to reflect reduced fears over inflationary pressures.
"We expect the RBI to leave its policy rate unchanged at 6.25 percent and to soften the stance of monetary policy on Wednesday. If so, we could see more portfolio inflows going forward," Scotiabank said in a report. "On the other hand, it will disappoint both the government and foreign investors if the central bank decides to keep up its hawkish tone this afternoon."
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