CNY (6.874) ▼

▪ Despite the Fed's continued rate hike and the People's Bank of China's (PBoC) persistently dovish stance, as indicated by the reduction in the reserve requirement ratio, the yuan managed to strengthen against the USD. This was partly due to the uncertainty surrounding the banking crisis in US and Europe, and solid China’s macroeconomic data (i.e. PMI).

▪ As the PBoC is expected to maintain its dovishness, the continued widening of US-China rate differentials may continue to exert pressure on the yuan in April. This, coupled with the prevailing market uncertainty and geopolitical tensions between the US and China may further constrain any potential gains for the yuan. Nonetheless, if economic data signals a strong post-reopening recovery, the yuan may maintain its position below the 6.90 level.

JPY (132.860) ▲

▪ The yen initially weakened to 137.0 against the USD on the expectation that the Bank of Japan (BoJ) would maintain a dovish stance while the Fed would continue to hike by 25 basis points. It later appreciated to 130.0 due to safe-haven flows as the USD and CHF's safe-haven status was diminished by the banking turmoil, but it then shed some gains as the market re-adjusted the Fed’s rate expectations.

▪ Even though the yen may continue to benefit from the weakening of the USD due to the Fed’s lack of direction and as US core PCE trend lower-than-expected, the main determinant of the Japanese currency's direction would be the spring wage negotiations. If there is a substantial wage increase, it may prompt the BoJ to review and hint that it may adjust its long- and short-term policy rates to pre-empt demand-pull inflation, leading to a strengthening of the yen.

Source: Kenanga Research - 3 Apr 2023