Asian Shares Drift, Dollar Firms Ahead of Central Bank Meetings

Asian shares drifted and the dollar firmed ahead of key central bank meetings this week, with investors awaiting decisions from the Federal Reserve, Bank of England, and Bank of Japan. The Federal Reserve is expected to maintain its current interest rate, but investors are looking for clues on future policy moves. The Bank of England is likely to raise rates, while the Bank of Japan is expected to keep its policy unchanged. The impact of these decisions on Asian stock markets will depend on the specific monetary policy actions taken by each central bank.



Investor sentiment plays a pivotal role in Asian markets, particularly during central bank meetings. A study by Wang et al. (2009) and Fu et al. (2020) highlights the impact of investor sentiment on stock market crash risk in the Asia-Pacific region. The research, using Principal Components Analysis (PCA) and Method of Moments Quantile Regression (MMQR), found that investor sentiment positively impacts crash risk in the middle to higher quantiles. Regional sentiment significantly increases crash risk, especially at higher quantiles, while local sentiment generally reduces crash risk at lower to middle quantiles. Thus, understanding investor sentiment is crucial for investors navigating Asian markets during central bank meetings.



The strength or weakness of the US dollar significantly impacts the performance of Asian stock indices. A stronger US dollar typically leads to a decline in Asian stock indices, as it makes imports cheaper, reducing the competitiveness of Asian exports. Conversely, a weaker US dollar boosts Asian stock indices, as it enhances the competitiveness of Asian exports. This relationship is evident in the Bloomberg-JPMorgan Asia Dollar Index (ADXY), which tracks a basket of Asian currencies against the US dollar. A higher ADXY implies strength in Asian currencies against the US dollar, leading to a decline in Asian stock indices, and vice versa.

Asian markets are sensitive to US dollar fluctuations, with currency-sensitive sectors like technology and consumer goods being particularly vulnerable. The Bloomberg-JPMorgan Asia Dollar Index (ADXY) tracks the performance of ten Asian currencies against the US dollar, with the Chinese Yuan holding the highest weightage at 41.18%. The correlation between ADXY and the Indian Rupee is high, indicating that Asian currencies move in tandem with the US dollar. Energy stocks, being under-owned, present an opportunity for investors seeking to diversify their portfolios.

In conclusion, the upcoming central bank meetings will have a significant impact on Asian stock markets, with investor sentiment playing a crucial role. The strength or weakness of the US dollar will also influence the performance of Asian stock indices, with currency-sensitive sectors being particularly vulnerable. Investors should closely monitor the monetary policy decisions of central banks and the movements of the US dollar to make informed investment decisions in the Asian markets.