CNY (6.936) ▼

▪ The yuan erased all of February’s trading gains against the USD mainly due to greenback’s newfound strength amid rising market expectation of a higher-for-longer Fed, especially after US core PCE increased by 0.6% MoM (consensus: 0.4%). Increasing monetary policy divergence between the Fed and PBoC, coupled with growing US-CN geopolitical tensions have also pressured the yuan to weaken by more than 2.0% MoM.

▪ The yuan may continue to depreciate and closed the month above the 7.00 threshold against the USD as the greenback is expected to be supported by another 25 bps rate hike by the Fed, while the PBoC is seen to remain accommodative in the near term. To add, rising global uncertainty and slower-than-expected China’s demand recovery may also weigh on the yuan. However, strong macroeconomic data (i.e PMI, trade and IPI) could provide some support to CNY.

JPY (136.730) ▼

▪ Despite Japan's red-hot core inflation reading of 4.2% YoY (highest since 1981), the yen weakened by more than 4.8% MoM against the USD as the incoming BoJ governor Ueda said that the central bank must maintain an ultra-easy policy for now. To add, the yen faced additional pressure due to the USD index recent surge above the 105.0 level, driven by the Fed’s hawkish reaffirmation on its monetary policy direction.

▪ As the BoJ is widely expected to keep its short- and longterm policy rates unchanged, while the Fed may continue to hike and maintain its ‘higher-for-longer’ mantra, the yen is expected to face depreciatory pressure and trade above the 135.0 level in March. However, any signal of a persistent inflationary pressure should be advantageous for the yen.

Source: Kenanga Research - 1 Mar 2023