CNY (7.242) ▼

▪ Despite weak US labour data and ISM services reading, the yuan continued to depreciate, close to the 7.25/USD level, its lowest in over six months. Steady demand recovery, as evidenced by China's solid trade data and rising inflation, has helped cap yuan losses but was offset by China weakening its daily reference rate. Additionality, the yuan was pressured by persistent capital outflow from China amid the PBoC-Fed monetary policy divergence.

▪ The divergence in economic indicators, particularly the upbeat Caixin PMI, which contrasted with the NBS PMI survey, suggests that China's recovery is struggling to maintain momentum, which may continue to weigh on the local note. Insufficient policy measures to boost domestic consumption, the ongoing property crisis, the wide interest rate gap with the US and a potentially unchanged Fed stance may keep the yuan above 7.20/USD for the time being.

JPY (157.113) ▼

▪ The yen appreciated sharply to 153.05/USD on May 3 from its 34-year low of 158.33/USD on April 26, due to the MoF FX intervention, deployed right after the less hawkish FOMC meeting. Additionally, a softer-than-expected US job report bolstered expectations of a Fed rate cut, further supporting the yen. However, the yen quickly reversed its gains and closed the month weaker due to a disappointing Japan's 1Q24 GDP reading and a slowdown in core CPI.

▪ Weak consumer spending figures suggest a cautious approach to further BoJ rate hikes, potentially weakening the yen. We identify 158.0/USD as the next intervention point. With the lack of robust macro data from Japan, especially on inflation, Tokyo may intervene to counter excessive volatility. Upcoming US data will be crucial ahead of the FOMC meeting; a relatively hawkish Fed alongside a dovish BoJ may keep the yen weak in the near term.

Source: Kenanga Research - 4 Jun 2024