Source: AFP
Source: AFP
Excessive USD strength can potentially threaten price stability and expose financial fragilities. More countries are resorting to currency interventions to stabilise local currencies. Currency interventions can work to slow depreciation but cannot substitute for better fundamentals or tighter policies consistent with a stable-to-stronger currency.
The Japanese authorities have reportedly intervened twice thus far to stem the JPY’s fall. Likewise, news reports suggested the People’s Bank of China (PBoC) intervened via state-owned banks after the USDCNY surge and tested the 2% daily trading band following the Party Congress. The PBoC has also been using stronger CNY fixings to lean against market sentiment.
Currency intervention cannot substitute for Fed tightening pause to sustain a JPY rebound
Source: Bloomberg, Bank of Singapore.
Wariness of Japan’s Ministry of Finance’s (MoF) JPY buying intervention is set to slow JPY weakness. However, it is premature to call time to USDJPY’s ascent until the Bank of Japan (BoJ) abandons its dovishness or US overheating risk eases enough to allow the Federal Reserve (Fed) to pause its tightening campaign. The BoJ’s resolutely dovish stance relative to a still-hawkish Fed and Japan’s trade deficit driven by elevated energy prices suggest continued near-term JPY underperformance.
Speculation that the BoJ will adjust its yield curve control policy upward will likely intensify when Governor Kuroda steps down in April 2023. The reopening of the economy and a recovery in inbound tourists should further push up the BoJ’s assessments on wage and price inflation. The timing of Kuroda’s retirement could coincide with a peak in US rates to pave way for USDJPY to reverse lower by mid-2023.
China assets declined recently despite global risk-on sentiment due to disappointment about the Party Congress. While major Chinese state-owned banks reportedly defended the CNY, the increase in investor concerns around the market-friendliness of policy following China’s leadership reshuffle could continue to nudge CNY weaker. Investors focused on President Xi’s centralisation of power and what this means for the sustainability of China’s rapid growth.
CNY weakness in turn is likely to weigh on other Asian currencies. The policy push on infrastructure remains the bright spot of the economy. However, the drop in October’s PMIs suggest further weakening of economic fundamentals, driven by slowing external demand, worsening lockdowns and the property fallout.
However, we do expect the government to move away gradually from its zero-Covid policy. Market sentiment on CNY could improve further down the road if there are signs pointing to a step back from its zero-Covid policy. The signposts to look for would include a renewed push on vaccinations, signs of hospitals increasing capacity and a campaign to reduce public fear of the virus. President Xi is expected to attend the G20 meeting in Bali on 15-16 November, with a potential in-person meeting with President Biden. This provides a venue for both sides to reset the relationship given recent US-China tensions from the new US semiconductor restrictions.
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