FX Daily: Relief rally in JPY and CNY amidst profit-taking in the DXY
USD/JPY dove 0.8% to 146.59 on the possibility of Japan bringing forward its monetary policy normalisation. Bank of Japan Kazuo Ueda said that Japan could have enough information on inflation and wages by the end of this year to decide whether to end its negative interest rate policy. According to recent polls, economists had expected such a decision to come after the Spring wage negotiations in 2024. However, Ueda probably targeted his comments at supporting the weak JPY, which hit a nine-month low of 147.83 per USD last Friday. Since BOJ’s decisions are data-dependent, players will pay attention to next week’s National CPI data released on the same day as the BOJ meeting on 22 September. Before that, markets must face the stronger US CPI expected tomorrow and the FOMC meeting on 20 September.
USD/CNY depreciated by 0.7% to 7.2894 on strong efforts by China to arrest its currency decline. China fixed the USD/CNY at 7.2148, significantly lower than Friday’s 16-year high of 7.3439. A positive reading for CPI inflation in August helped to play down deflation risks and ease the gloom over last Thursday’s weak trade data. The central bank (PBOC) issued a strong statement signalling its readiness to 1) act decisively against one-sided pro-cyclical speculation against its exchange rate and 2) deal firmly with actions to disrupt markets. With effect from 15 September, the reserve requirement ratio for foreign exchange deposits of financial institutions will fall from 6% to 4%. However, China still needs to restore confidence in its economy. Yesterday, US Deputy Treasury Secretary Wally Adeyemo said on CNN that China’s economy faced “significant headwinds” that could impact Asia and Europe. At the G20 Summit last Friday, US Treasury Secretary Janet Yellen said that China had the “policy space” to address its slowdown, which she did not expect would significantly impact on the resilient US economy. All said, China may want to keep the CNY stable into the Golden Week holiday in early October.
After an eight-week rally, profit-taking lowered the DXY by 0.5% to 104.5 on Monday. Investors cheered the weaker USD. Dow, S&P 500, and Nasdaq Composite rose 0.3%, 0.7%, and 1.1%, respectively. While the US Treasury 2Y yield was flat at 4.99% on Monday, the 10Y yield firmed 2.4 bps to 4.29% ahead of tomorrow’s US CPI data. Consensus sees headline inflation rising to 3.6% YoY in August from 3.2% in July, but core inflation softening to 4.3% from 4.7%. The European Central Bank’s first pause expected on Thursday may be another reason holding back another aggressive sell-off in the USD.
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