CNY (7.091) ▼

• The yuan strengthened sharply, falling below 7.10/USD for the first time since June 2023, driven by a marked decline in the USD index following Fed Powell's dovish tone post-FOMC. The CNY has also benefited from the narrowing of the 2-year ChinaUS negative yield differential (August average: -239.0 bps; July: -292.0 bps). Market expectations of up to 100 bps in Fed rate cuts this year have pressured US yields, while the prospect of intervention by the PBoC has supported Chinese yields.

• Several factors could influence the yuan's trajectory in September, with US macro conditions and Fed policy decision being paramount. Our base case of a relatively stable US labour market and a 25 bps rate cut by the Fed may bolster the USD, limiting yuan gains. Additionally, China's weak growth could lead to further PBoC easing, dampening appetite for Chinese assets and triggering outflows, which would pressure the yuan. A less dovish Fed, combined with domestic economic challenges, could worsen the outlook for the yuan.

JPY (146.170) ▬

• Similarly, after trading between 150.0 and 160.0 for the past eight months, the yen appreciated sharply to 142.42 against the USD, driven by the unwinding of carry trades following the Bank of Japan's (BoJ) unexpected rate hike in late July and the Fed's indication of a potential rate cut in early August. The yen has since stabilised around 144.0 - 146.0, aided by a weak US job report and Powell's continued dovishness.

• Tokyo’s CPI reacceleration and stronger-than-expected 2Q24 GDP growth support the BoJ's view of economic recovery, buoyed by a rebound in household consumption. Expectations of solid wage growth and rising price pressures suggest room for a hawkish surprise , though we expect the BoJ to maintain status quo in September. Nevertheless, the yen may trade within the 145.0 - 150.0 range in the coming weeks, as a less dovish guide by the Fed and uncertainty surrounding Japan’s macro policies following PM Kishida's resignation could introduce volatility.

Source: Kenanga Research - 3 Sept 2024