CNY (7.254) ▬

▪ Despite the Fed's decision to ‘skip’ a rate hike in June, the yuan has continued to weakened above the 7.25/USD level, mainly due to the increasing monetary policy divergence between the Fed and the PBoC, as the latter unexpectedly reduced its key policy rates by 10 basis points. The yuan was also pressured by China's disappointing export data, reflecting the ongoing decline in global demand.

▪ The yuan may continue to trade under pressure due to the ongoing low interest rate environment, especially if the PBoC cuts policy rates further in July. However, any boost in the form of a fiscal stimulus may help to prop up the yuan in the near term. This, coupled with a moderation in US inflation rates and another rate hike 'skip' in July may also benefit the yuan. Additionally, stronger PBoC daily fixing may help to keep the yuan's weakness within a controllable range.

JPY (144.310) ▲

▪ The yen closed the last trading day of June near the 145.0 level against the USD, an almost eight-month low, as the BoJ kept its ultra-loose monetary policy settings unchanged while the Fed continued to strike a hawkish tone. Also, the deepening of US Treasury yield curve inversions and increasing odds of a recession has helped to keep the USD strong, especially against currency with a dovish central bank like Japan.

▪ Expectations of a hawkish Fed may lead the yen to weaken above the 145.0 level in the first week of July. However, if US inflation turns out to be lower than expected, the yen could regain some of its losses. The BoJ may intervene if the yen breaches the 145.0/USD threshold. In its July monetary policy meeting, the BoJ may revise its inflation forecasts upward and surprise the market by adjusting its yield curve control, potentially causing a sharp appreciation of the yen.

Source: Kenanga Research - 3 Jul 2023