CNY (7.149) ▲

▪ The weakening of the USD index (DXY) due to a lower-than-expected US core CPI reading, coupled with the Fed's dovish hike, has helped the yuan to reverse some of its June losses. Domestically, the local currency has been supported by stronger-than-expected People Bank of China's (PBoC) fixing, state bank's FX intervention measures, and optimism surrounding the expected government's stimulus pledge.

▪ The direction of the yuan in August is expected to continue to be mainly steered by the DXY. Weaker-than-expected US job data, coupled with continued disinflationary readings, may help the yuan extend its gains. Additionally, any introduction of major economic stimulus measures should help to push the yuan to trade closer to the 7.0/USD threshold. However, the continued divergence between the Fed and PBoC may pull the yuan in the opposite direction.

JPY (142.250) ▲

▪ Despite the Bank of Japan's (BoJ) surprise tweak to its conduct of yield curve control, the yen continued to trade weak above the 140.0/USD level as the market did not view the vague tightening as a precursor to the bank's withdrawal from its ultra-easy policy. However, the recent weakening of the DXY, coupled with Japan’s rising prices has helped the yen to strengthened marginally against the greenback.

▪ Signs of persistent demand-pull inflation in Japan, coupled with a potentially stronger 2Q23 GDP reading, may help to support BoJ's policy normalisation narrative and strengthen the yen. Additionally, the weak USD bias, amid expectations that the Fed has reached the end of its policy-tightening cycle, is seen to bolster the yen, pushing it to trade below the 140.0/USD threshold in August. Nevertheless, negative USJapan yield differential may continue to pressure the yen.

Source: Kenanga Research - 1 Aug 2023