CNY (6.918) ▲

▪ China's lower-than-expected inflation reading of 0.7% YoY (Feb: 1.0%) has sparked concerns about the country's post reopening recovery, causing the yuan to weaken to above the 6.90 threshold against the USD. However, yuan’s appreciation has been limited due to China's robust 1Q23 GDP reading of 4.5% YoY (4Q22: 2.9%; consensus: 4.0%).

▪ The direction of the yuan in May is likely to be influenced primarily by the trajectory of the USD index (DXY), which is expected to trend weaker near the 101.0 level. Even though the Fed is expected to raise interest rate by another 25 basis points (bps), any hint of dovish guidance, no matter how subtle, may trigger a sell-off in the USD and benefit the yuan. However, the continued dovishness of the PBoC and USChina friction may limit the yuan's appreciation.

JPY (136.300) ▲

▪ The yen initially strengthened against the USD, dropping below the 132.0 level due to a slowdown in the US labour market. However, it later reversed its trend as Treasury yields rose on the back of strong US economic activity. Additionally, the Bank of Japan's (BoJ) decision to maintain its status quo under the new governor added pressure to the local currency, pushing it to trade above the 136.0 level.

▪ The widening of the Japan-US interest differential due to BoJ's ultra-loose monetary policy and Fed's potential 25 bps hike (>80.0% odds, partly due to hot US PCE reading) may continue to pressure the yen to trade above the 133.0 level in May. However, if there are any signs that Japan's inflationary pressure is worsening and if the Fed hinted at a rate pause (as early as June), the yen may experience a decent appreciation and approach the 130.0 threshold.

Source: Kenanga Research - 2 May 2023