CNY (6.754) ▲

▪ The yuan extended its gains for the third consecutive month against the USD, largely supported by the strong demand for the Chinese currency due to its safe-haven appeal after the country's move to end its zero-COVID-19 policy. However, the yuan was pressured by China’s below target full-year GDP growth reading of 3.0% (government’s target: 5.5%).

▪ The potential weakening of the greenback in February due to the Fed's less hawkish guidance, coupled with the continued net capital inflows to China may continue to benefit the redback and potentially push the USDCNY pair closer to the 6.70 level. Nevertheless, the yuan may face depreciation pressure if the People's Bank of China continues to uphold a dovish tone during its monetary policy meeting and eventually cut the 1-year loan prime rate.

JPY (130.400) ▲

▪ The yen's appreciation to as strong as 127.87 on January 13 against the USD was short-lived as the Bank of Japan (BoJ) defied market expectation by keeping the target band for its long-term interest rate unchanged at 0.50%. That being said, the yen still strengthened by more than 0.50% vis-a-vis the USD to close the month near the 130.00 threshold, as Tokyo red-hot inflation reading of 4.4% YoY (Dec: 4.0%) fuels hawkish BoJ bets.

▪ Growing expectations that the BoJ may shift toward further tightening to curb its accelerating inflation, coupled with the market view that the Fed may pause its rate hike cycle soon may help the yen to strengthen below the 130.00 psychological level against the USD in February. However, the local note may pare some gains if Japan 4Q22 GDP reading turns out to be weaker-than-expected.

Source: Kenanga Research - 2 Feb 2023