CNY (7.100) ▲

• As expected, the CNY ended 2023 at 7.10 against the USD, primarily influenced by the cooler-than-expected US inflation reading and dovish signals from the Fed. The yuan's strength was further buoyed by the PBoC's strong fixing bias. Nevertheless, yuan’s appreciation was tempered by indications of weak consumer spending.

• The persistent depreciation of the USD, driven by expectations of swifter-than-expected Fed rate cuts, is likely to remain the primary catalyst for the yuan in 1Q24. The bleak economic outlook for China may continue to deter capital inflows into the country, hurting the yuan. However, any new stimulus measures implemented by the government, coupled with an uptick in consumer spending, has the potential to bolster the yuan's performance in 2024.

JPY (141.040) ▲

• The yen strengthened by more than 4.0% in December, closing 2023 near the 140.0 threshold against the USD. This surge can be attributed primarily to the Fed's dovish narrative and the increasing market anticipation of a potential shift in the BoJ monetary policy stance. Although the BoJ did not take action in its December meeting, Governor Ueda's hawkish post-meeting remarks in parliament played a significant role in strengthening the yen.

• The rising possibility that the BoJ may terminate the YCC in 1Q24 and provide hints about exiting its negative interest rate policy could further propel the yen to trade stronger against the weakening USD. Attention will shift to the US labour market data in the first week of 2024, and the yen may extend its gain if the economic data from the US continues to disappoint the market. Investors will also closely monitor signs of sustainable wage growth in Japan, as this will be pivotal in determining BoJ's monetary policy direction.

Source: Kenanga Research - 2 Jan 2024