CNY (7.189) ▬

▪ The yuan traded relatively unchanged in the 7.181-7.199 range throughout February due to the week-long closure of the Chinese market for the Lunar New Year holiday. Despite the PBoC implementing a 25 bps rate cut to the 5-year loan prime rate, aimed at supporting the recovery of the property market, the yuan experienced a 0.27% MoM decline as the USD index (DXY) surged to an average of 104.1 last month.

▪ Domestically, the yuan's movement is expected to be primarily influenced by China's "Two Sessions" gathering, PBoC interest rate decision, and overall macroeconomic performance. A favourable outcome in these areas may lead to increased capital inflows, thereby boosting the CNY. Meanwhile, the USD may shed some gains this month, if US data shows that the economy is slowing, benefiting the yuan.

JPY (150.100) ▲

▪ The strengthening of the USD, driven by robust US jobs data and a hotter-than-expected CPI reading, has prompted investors to scale back their expectations of a Fed rate cut, consequently boosting the DXY. The strong USD, coupled with Japan's entry into a recession in 2H23, has pushed the yen to breach the 150.0/USD intervention threshold. However, the yen's losses were capped by a higher-thanexpected Japan core inflation reading and a resilient retail sales performance, fuelling expectations of a BoJ pivot.

▪ While we anticipate that the BoJ may maintain the status quo in its March policy rate meeting, we expect the yen to appreciate against the USD. This anticipation is rooted in our expectation that the 2024 Shuntō wage increase will surpass that of the previous year, establishing a positive cycle of rising prices and wages. This, in turn, is seen as a catalyst to boost household consumption and elevate long-term inflation—a necessary condition for the BoJ to exit its NIRP.

Source: Kenanga Research - 1 Mar 2024