CNY (7.267) ▼

• Despite an improvement in the manufacturing PMI and stronger-than-expected trade and retail sales figures, the yuan has weakened to its lowest level in over seven months against the USD. This decline is primarily attributed to persistent capital outflows driven by significant China-US yield differentials. Additionally, the PBoC's status quo and weak daily fixings have contributed to this depreciation.

• While there is potential for the yuan to appreciate by the end of the year, bolstered by a possible Fed rate cut and an improving Chinese economic outlook, substantial headwinds from the US election and policy uncertainty may keep the yuan around its current level for now. Furthermore, persistent weak fixings aimed at stimulating exports and generating inflationary pressure may continue to exert downward pressure on the yuan.

JPY (160.880) ▲

• The yen depreciated to its weakest level in nearly 38 years against the USD, primarily due to the Bank of Japan's (BoJ) inaction, which was influenced by pockets of economic weakness and the absence of demand-driven inflation. Mixed US economic data and uncertainty surrounding Fed monetary policy have also exerted pressure on the yen. The lack of intervention from authorities has led to the yen breaching the psychological threshold of 160.0/USD.

• The MoF may continue to monitor USD trends and economic data before deciding on further intervention. We anticipate the next potential intervention point to be around 163.0- 164.0/USD. The sharp decline in the yen could prompt the BoJ to raise rates as early as July 31st, predicated on Japanese firms would pass on wage costs to service prices, thereby increasing inflation. Coupled with our expectation of a weakening US economy, this may help the yen recover some losses and appreciate against the USD in July.

Source: Kenanga Research - 1 Jul 2024