CNY (7.135) ▲

• The sharp decline in the USD index to as low as 102.7 (Nov 28) from 106.9 (Nov 1) has resulted in a 2.5% appreciation of the yuan against the USD. This is mainly driven by increasing signs of disinflation in the US, coupled with the prospect of a potential turnaround in the Chinese economy. Additionally, the yuan has been bolstered by state-owned banks' yuan-buying activities and the People's Bank of China's (PBoC) strong fixing bias.

• Persistent widening of the US-China interest rates differential and China's uneven economic recovery may continue to put pressure on the yuan towards year-end. The yuan may face more pressure if the PBoC embarks on more policy easing. However, the increasing likelihood that the Fed may turn dovish in December, coupled with continued interventions by the government, may keep the yuan buoyant around the 7.10/USD level.

JPY (147.570) ▲

• Despite the absence of currency intervention, the yen strengthened towards the 147.0/USD level for the first time in over two months. The JPY was primarily supported by a sharp decline in the 10-year US Treasury yield amid growing expectations that the Fed has completed its rate hiking cycle. Hawkish speculation on the Bank of Japan's (BoJ) next move has also helped to boost the local currency.

• Even though the BoJ's Governor continued to express uncertainty about the sustainability of inflation, broadening price pressures stemming from Japan's tight labour market and a surge in inbound tourism may support the yen in December. Increasing signs of demand-driven inflation could prompt the central bank to adopt a more hawkish stance. This, coupled with potential signals from the Fed hinting at a shift towards accommodation, should bolster the JPY.

Source: Kenanga Research - 1 Dec 2023