China’s COVID-19 Situation and Possible BoJ’s Policy Tweak to Shape FX Trend in January: Kenanga

In Kenanga Research’s FX Monthly Outlook report, it gives a bearish forecast for the Chinese Yuan (CNY). The persistent USD’s strength, coupled with China’s economic slowdown has hurt the Yuan in 2022, causing it to depreciate by more than 8.0% against the USD. However, Beijing’s move to roll back on its zero-COVID policy, coupled with USD seasonal weakness has helped to boost the yuan, up by 2.7% MoM in December against the greenback.

Even though CNY may continue to benefit from China’s reopening optimism, the continued contraction in domestic manufacturing PMI and surging new infections is expected to weaken the yuan, pushing it back to trade around the 6.90 – 7.00 level in January. On top of that, the expectation of a further slowdown in China’s exports and People’s Bank of China dovish stance may further drag the Chinese Yuan downward.

On the contrary, the research house gives the Japanese Yen (JPY) a bullish forecast. Despite ending the year as Asia’s worst performing currency (down 13.9%), the JPY appreciated by 5.6% MoM against the USD, mainly due to the Bank of Japan’s (BoJ) surprise tweak to its yield curve control (YCC). After being battered by the Fed’s back-to-back rate hikes, the cooler-than-expected US core inflation reading for November has helped to bring down the USD index and gave the Japanese currency a breather.

JPY is expected to extend its gains in January and trade below the 130.0 threshold against the USD as the BoJ is expected to announce further tweak to its YCC during its policy meeting on 17-18 January. The BoJ may also raise its inflation forecasts during the meeting, a move that could signal a shift in the bank’s monetary stance. However, a widening of the Japan-US interest rate differential may continue to drive flows away from Japan, hurting the yen.

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