CNY (7.169) ▲

• The yuan has unsurprisingly reversed its December’s gains against the USD. This is partly attributed to the strengthening of the USD index (DXY), driven by resistance from Fed officials against an early easing and ongoing weaknesses in the Chinese economy. Despite this, the yuan's losses have been mitigated by improving NBS PMI readings, widening trade surplus and various stimulus measures.

• The yuan may continue to trade near the 7.20/USD level in February, as the DXY is expected to remain elevated due to Fed's Powell dismissing the possibility of a rate cut in March. Also, the persisting weakness in Chinese asset markets may continue to exert pressure on the yuan. However, measures such as policy easing by the People’s Bank of China and government stimulus may help to curb excessive outflows.

JPY (147.830) ▲

• The rising 10-year US Treasury yield, driven by signs of the Fed's reluctance to reverse its tightening measures amid robust US macro data, has once again propelled the JPY to trade above the 145.0/USD threshold. This, combined with the Bank of Japan (BoJ) maintaining its ultra-loose monetary policy due to disappointing wage figures and weak household spending, has contributed to the JPY weakness.

• Weaker-than-expected Japanese macro readings suggest that 4Q23 GDP may be softer than anticipated, adding pressure to the yen. This, along with uncertainties in the inflation path due to the government's subsidy programs, may continue to delay the timing of the BoJ's pivot from quantitative easing. However, a tightening labour market, sustained inbound tourism surge, and solid corporate profits could support the yen until the long-awaited Shuntō in March. Also, escalating tensions in the Middle East may attract some haven flows, benefiting the yen marginally.

Source: Kenanga Research - 2 Feb 2024