Asia FX Monthly Outlook - 1 June 2023

Hinges on US debt ceiling deal and the Fed monetary policy decision

CNY (7.109) ▲

  • The yuan weakened above the 7.00 per USD threshold for the first time since Dec 2022 due to increased demand for the safe-haven greenback amid US debt ceiling crisis and bets of another 25 bps rate hike by the Fed. To add, the yuan was also pressured by dissipating optimism over China's recovery amid disappointing domestic economic data.
  • The continued divergence between the PBoC and the Fed, combined with waning confidence in a strong China’s reopening rebound may continue to weigh on the yuan. However, a resolution of the US debt ceiling issue could potentially provide some support to the yuan. Also, if US inflation trends lower-than-expected, it could potentially lead to a shift in the Fed's hawkish narrative, which in turn could weaken the USD and benefit the yuan.

JPY (139.99) ▼

  • In the first week of May, the yen strengthened against the USD following the Fed’s subtle hint of a possible pause in its May meeting. However, since then, the yen has depreciated, breaching the 140.0 threshold due to rising US treasury yields amid the US debt ceiling impasse, as well as rising bets of another rate hike by the Fed in June. To add, Japan's weak macroeconomic readings and Governor Ueda's dovish remarks have further hampered the yen's performance.
  • Despite Japan's higher-than-expected April inflation reading of 3.5% YoY (consensus: 2.5%), the BoJ is expected to keep its short- and long-term policy rates unchanged in June as the current rise in inflation is still seen as a result of costpush factor rather than demand-pull. This, coupled with the ongoing hawkish market sentiment on the Fed's monetary policy direction could exert additional downward pressure on the yen, potentially leading to calls for intervention.