Asian stocks stutter ahead of Fed, frail Japanese yen in focus

SINGAPORE  – Asian stocks inched lower on Wednesday ahead of a keenly-awaited policy decision from the Federal Reserve later in the day, while the yen was stuck near one-year lows against the dollar, keeping markets on edge for possible intervention by Tokyo.

MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.13 percent lower, starting November in a somber mood after clocking three straight months of losses. Japan’s Nikkei was 2 percent higher.

China shares eased 0.15 percent, while the Hong Kong’s Hang Seng Index fell 0.75 percent.

China’s factory activity unexpectedly contracted in October, a private survey showed on Wednesday, adding to a downbeat official manufacturing survey the previous day and raising questions over the country’s fragile economic recovery at the start of the fourth quarter.

Market focus in Asia though was firmly on the yen in the wake of the Bank of Japan’s decision to tweak its bond yield control policy again on Tuesday, further loosening its grip on long-term interest rates.

READ: BOJ relaxes grip on rates as end to yield control looms

The move drove a broad slide in the yen on Tuesday, tumbling to a one-year low against the dollar and touching a 15-year low against the euro as investors had expected a bigger BOJ step towards ending years of massive monetary stimulus.

“The market has seen the tweak to a flexible regime as clear dovish development,” said Chris Weston, head of research at Pepperstone.

“Once again market players have been left frustrated by the lack of urgency shown by the BOJ, and either closed yen longs or flipped into outright yen shorts.”

The sharp drop in the yen prompted a fresh warning from Japan’s top currency diplomat Masato Kanda that authorities were on standby to respond to recent “one-sided, sharp” moves in the currency.

The yen strengthened 0.27 percent to 151.26 per dollar following the comments but remained close to one-year lows of 151.74 it touched on Tuesday.

ING economists said the market will likely further test levels above the 150 region now that it has been breached with no official response.

“The next critical level could be 152 in the short-term, but could go beyond that depending on U.S. data outcomes and FOMC decisions.”

FED awaits

Overnight, Wall Street’s main indexes ended higher, with investors looking ahead to the Fed policy decision later in the day, when the central bank is expected to stand pat on interest rates.

READ: Wall St closes higher on eve of Fed decision; investors assess earnings

Traders will scrutinize what Fed Chair Jerome Powell says in his post-policy meeting comments to gauge the path of interest rates and how long rates will stay elevated.

Erik Weisman, chief economist and portfolio manager at MFS Investment Management, said the Fed will keep the option of future rate hikes firmly on the table until the labor market cools considerably and inflationary pressures ease.

“Chairman Powell will also argue that the lagged effects of past hikes have not fully impacted the economy and that patience is prudent.”

Treasury yields remained elevated, with the yield on 10-year Treasury notes up 5.4 basis points at 4.929 percent. The yield on the 30-year Treasury bond was up 6.6 basis points to 5.090 percent.

Against a basket of currencies, the dollar was up 0.056 percent at 106.73. Sterling was last at $1.2136, down 0.13 percent on the day.

Oil prices inched higher ahead of the Fed decision, with the market keeping a close eye on the latest developments in the Israel-Hamas conflict.

U.S. crude rose 0.28 percent to $81.25 per barrel and Brent was at $85.32, up 0.35 percent on the day.

Gold prices were slightly lower, with Spot gold easing 0.2 percent to $1,978.99 an ounce, remaining below $2,000 level it breached last month due to strong safe asset rally.