CNY (7.316) ▼

• Despite China's better-than-expected 3Q23 GDP reading (4.9%; Consensus: 4.5%), the yuan continued to depreciate against the greenback in October due to increased demand for the USD amid the Middle East crisis. Additionally, the yuan faced pressure from slowing economic momentum in October, as evidenced by weak manufacturing PMI data. The ongoing real estate crisis further compounded the challenges, making the yuan unfavourable to investors.

• The unfavourable US-China negative yield differential may continue to prompt capital outflows from China and exert pressure on the yuan in November. This, combined with the escalating property crisis, could keep the yuan above the 7.30/USD threshold. Nevertheless, the government's ongoing efforts to stimulate the economy and the People's Bank of China's continued intervention in the foreign exchange market may curb yuan’s further depreciation.

JPY (150.69) ▼

• Soaring US bond yields, driven by the Fed's persistent hawkish expectations, have continued to increase the demand for USD and weaken the JPY. This, coupled with the Bank of Japan's "lukewarm" hawkish move, resulting from its lack of conviction in the sustainability of inflation, has pressured the yen to close above 150.0/USD by October.

• The yen may continue to trade above the 150.0 threshold against the USD in the coming weeks as the Fed is projected to reiterate its 'higher-for-longer' mantra in November, while the BoJ may only turn hawkish and terminate the yield curve control policy next year. Even though the rise in 10-year JGB yields may provide marginal support for the yen, the absence of pro-domestic catalysts and a strong US economic outlook may continue to exert pressure on the yen.

Source: Kenanga Research - 1 Nov 2023