Pushback against CNY & JPY weakness

CNY & JPY: Stronger daily fix & verbal intervention provide support

The Chinese renminbi has rebounded during the Asian trading session following the sell-off at the end of last week. It has resulted in USD/CNY falling back towards the 7.2000-level. The main trigger for the stronger renminbi overnight was the signal from the PBoC who set a stronger than expected daily fix for USD/CNY at 7.0996 down from the fix set on Friday at 7.1004. It has helped to dampen speculation in the near-term that policymakers in China are becoming more tolerant of a weaker currency. Speculation over an adjustment lower for the renminbi intensified at the end of last week after the PBoC lifted the daily fix by 0.0062 to 7.1004 on Friday which resulted in USD/CNY breaking back above resistance at the 7.2000-level for the first time since mid-November. Renewed upward pressure on USD/CNY has also coincided with a broader rebound for the US dollar over the last couple of weeks. The US dollar extended its rebound last week after expectations over monetary easing outside of the US intensified in response to the SNB’s decision to become the first G10 central bank to cut rates and a bigger dovish shift in policy guidance from the BoE following last week’s MPC meeting. Recent price action has increased the likelihood that USD/CNY could retest last year’s highs at just above the 7.3000-level although we remain unconvinced at the current juncture that Chinese policymakers will now allow a much weaker renminbi. We still believe that maintaining currency stability is an important policy goal for China.      

The yen also weakened further last week despite the BoJ’s decision to finally tighten monetary policy in response to higher inflation by bringing an end to negative rate policy and yield curve control (YCC). It has resulted in USD/JPY moving back to within touching distance of the highs from the last couple years at just below the 152.00-level. Renewed yen weakness is drawing more concern from Japanese policymakers similar to in the autumn of 2022 and 2023. In 2022 Japanese officials intervened to support the yen which triggered a temporary rebound between October 2022 and January 2023. While in 2023 Japanese officials refrained from intervening as intensified speculation over Fed rate cuts triggered a yen rebound between November and December 2023. Japanese officials find themselves under pressure to support the yen again after market participants have scaled Fed rate cut expectations at the start of this year in response to stronger US inflation data. Last week’s reassurance from the Fed that they still plan to deliver three rate cuts this year has not been sufficient on its own to prevent the US dollar from strengthening further last week.

However, we do expect verbal intervention from Japanese officials to help dampen further upside for USD/JPY in the near-term. Japan’s top currency official Masato Kanda warned overnight that “the current weakening of the yen is not in line with fundamentals and is clearly driven by speculation. We will take appropriate action against excessive fluctuations, without ruling out any options”. He also added that “ we are always prepared” when asked about the prospect of direct intervention. He noted that the “large fluctuation of 4% in just two weeks in USD/JPY” does not reflect fundamentals which he finds “unusual”.            

MOVE HIGHER IN USD/JPY NOT FULLY BACKED BY FUNDAMENTALS

Source: Bloomberg, Macrobond & MUFG GMR

GBP/SEK: Will Riksbank be next European central bank to provide dovish update?

The European currencies of the Swedish krona, Swiss franc and the pound all underperformed last week as the US dollar continued to rebound. As we highlighted above European currencies have been undermined over the past week by intensified speculation over monetary easing by regional central banks. The SNB’s decision to become the first G10 central bank to begin cutting rates last week was quickly followed up by a bigger than expected dovish shift in policy guidance from the BoE. In particular comments from Governor Bailey after last week’s MPC meeting have provided a stronger signal that the BoE could begin to cut rates ahead of the Fed and ECB. He told the FT at the end of last week that rate cuts were “in play”  at future policy meetings. While it is not our base case scenario, the comment indicates that the BoE could begin to cut rates as soon as at the next MPC meeting in May although it would likely require a significant downward revision to the inflation forecasts that helps ease concern amongst MPC members over a pick-up in inflation in the 2H of this year after headline inflation is expected to fall temporarily back below their 2.0% target in Q2. The UK rate market still judges that a May rate cut remains a low probability (roughly around 1 in 4) whereas a June cut is judged as much more likely (roughly around 3 in 4 probability).

The Swedish krona has also weakened ahead of this week’s Riksbank policy meeting on Wednesday. While the Riksbank is expected to leave rates on hold this week, we do expect the Riksbank to provide dovish policy guidance that could tee up a rate cut as soon as at the next policy meeting in May. The Swedish rate market is currently pricing in just below a 50:50 probability of May rate cut. Like in Switzerland and the UK, inflation has surprised to the downside in Sweden at the start of this year creating room for the Riksbank to make monetary policy less restrictive. In our latest FX Weekly report (click here), we recommended a new long EUR/SEK trade idea.        

KEY RELEASES AND EVENTS

Source: Bloomberg