Asia FX Monthly Outlook - 3 July 2023

To be steered by US macroeconomic readings and central banks’ monetary policy decisions

CNY (7.254)

  • Despite the Fed's decision to ‘skip’ a rate hike in June, the yuan has continued to weakened above the 7.25/USD level, mainly due to the increasing monetary policy divergence between the Fed and the PBoC, as the latter unexpectedly reduced its key policy rates by 10 basis points. The yuan was also pressured by China's disappointing export data, reflecting the ongoing decline in global demand.
  • The yuan may continue to trade under pressure due to the ongoing low interest rate environment, especially if the PBoC cuts policy rates further in July. However, any boost in the form of a fiscal stimulus may help to prop up the yuan in the near term. This, coupled with a moderation in US inflation rates and another rate hike 'skip' in July may also benefit the yuan. Additionally, stronger PBoC daily fixing may help to keep the yuan's weakness within a controllable range.