Asian currencies are under pressure under a strong dollar, with the offshore RMB approaching 7.3 and the yen likely to hit a new low

The Fed has repeatedly delayed the timing of the interest rate cut, and traders seem to have given up the fantasy of going long on Asian currencies in the short term.

On June 21, the central parity rate of the RMB against the US dollar was 7.1196, down 4 points, hitting a new low in nearly six months. Despite this, the deviation of the central parity rate from the model is still close to 1,000 points (adjusted), showing the central bank's willingness to maintain stability. As of the close of the day, the USD/RMB was 7.2613, close to the 2% fluctuation range, and the USD/offshore RMB was 7.2905, approaching the 7.3 mark.

It is not just the RMB that is under pressure in the Asian market. As of the 21st, the USD/JPY was 159.775, and the yen was about to fall below the historical low set in April (160.04). Traders generally believe that the Bank of Japan has been slow to raise interest rates again, and the yen will continue to be under pressure in the short term, which will suppress the overall sentiment of the Asian foreign exchange market.

It is expected that the timing of the Fed's interest rate cut in the second half of the year is not yet determined, and with the US election approaching, it is difficult for the pressure on the Asian foreign exchange market to be substantially reduced. Pan Gongsheng, governor of the People's Bank of China, said at the Lujiazui Forum on the 19th that the RMB exchange rate has remained basically stable under complex circumstances. The timing of the monetary policy shift of major developed economies this year has been constantly adjusted, and the interest rate gap between China and the United States has remained at a relatively high level. We insist on the decisive role of the market in the exchange rate formation mechanism, but at the same time we will strengthen the guidance of expectations and resolutely prevent the exchange rate from overshooting.

It is still difficult for the strong dollar to reverse in the short term

The recent inflation data in the United States has shown signs of downward movement, but in the context of a strong labor market and still sticky core inflation, it is still difficult to change the low interest rate cut expectations in the short term, which also leads to the US dollar index moving towards 106.

The year-on-year increase in the US CPI in May announced on June 12 fell from 3.4% to 3.3% (only 0 month-on-month), and the super core CPI monthly rate showed negative growth for the first time in two years. However, considering that the Federal Reserve needs to observe data for 2 to 3 consecutive months, the US dollar index fell short-term and broke through 104 and then quickly pulled up, and is now attacking 106 again.

"After several rounds of weak inflation data and slowing retail sales, the market has returned to expectations of 1-2 rate cuts before the end of the year, but there is little chance of a rate cut before September," Matt Weller, global research director at Gain Capital, told reporters. Traders expect the Fed to have only a 10% chance of cutting interest rates at the July meeting. After all, Fed Chairman Powell also sounded a relatively hawkish tone after the June meeting, emphasizing that recent data has not yet convinced the Fed that inflation is approaching its target; the Fed also raised its core PCE inflation forecast for 2024 and 2025.

The euro is also in a difficult situation, exacerbating the strength of the dollar. In early June, the European Central Bank announced a 25BP rate cut, but the uncertainty of the French election dragged down the euro. "If investors do not reduce the political risk premium, there is no way EUR/USD will have much room to rise. It will be difficult for the euro to improve before the first round of parliamentary votes in France on June 30," said Weller.

Foreign exchange expert and general manager of the financial market business department of Zhejiang Zhongtuo Group, Liu Yang, also told reporters: "With the accumulation of political uncertainty in Europe, the euro is difficult to strengthen itself. It is estimated that it will be suppressed by the US dollar in the short term, and the US dollar index seems to be looking up to 107."

The yen is heading for a new low again

Recently, the non-US dollar foreign exchange market has been quite weak, especially Asian currencies.

"Asian currencies are weak, and this issue has become a focus of discussion among market participants and policymakers. We have seen Japan's foreign exchange intervention, Indonesia's interest rate hikes to stabilize the currency, and increased comments on foreign exchange from policymakers in South Korea and Malaysia." Eric Robertsen, global chief strategist at Standard Chartered, told reporters.

He believes that for Asian currencies, domestic fundamentals seem to be secondary to external factors. The weakening expectations of the Federal Reserve's rate cuts continue to support the strength of the US dollar, although many Asian economies currently have relatively ideal economic growth and inflation. Among emerging market currencies, only the Mexican peso has a positive spot return against the US dollar in 2024, and even the previously sought-after Indian rupee is still trying to narrow its previous decline against the US dollar.

Robertson believes that the market will hold its breath until the Fed believes that the conditions for rate cuts have been met. Before that, Asian foreign exchange markets may still be collectively under pressure.

Since the beginning of this year, the yen has been the weakest major currency in the Asian foreign exchange market. Despite the interest rate hike by the Bank of Japan, the yen has been getting worse and worse, falling below the 160 mark against the US dollar at the end of April. The Bank of Japan then intervened in the market, and the dollar/yen once returned to around 150; at the monetary policy meeting on June 14, the Bank of Japan kept the target interest rate unchanged at 0~0.1%, in line with market expectations, and said that it would release a plan to reduce the purchase of Japanese government bonds in the next 1~2 years at the July meeting. However, this did not work on the yen exchange rate, and the yen is about to fall below the 160 mark against the US dollar.

UBS told reporters that the Bank of Japan has shifted from its previous ultra-loose monetary policy to not actively using bond purchases as a quantitative adjustment tool. Quantitative tightening is still a response to sudden interest rate fluctuations, which may be carried out in a gradual manner. The agency expects that the Bank of Japan may reduce its monthly bond purchases by about 2 trillion yen to 4 trillion yen in the next year. Based on this, the scale of the Bank of Japan's government bond holdings will shrink by about 3% to 5% each year, which may mean that the upward space of the 10-year government bond yield will be limited to 10 to 15 basis points.

The reason why the yen is indifferent is that UBS believes that the current recovery of Japan's economy may be slower than previously expected, so the agency postponed the time of the Bank of Japan's first interest rate hike from July to October.

Considering the negative impact of the depreciation of the yen on the economy, institutions generally believe that the Bank of Japan may support the yen under political pressure. Policy adjustments such as raising renewable energy charges may hinder inflation cooling. At the same time, the stronger-than-expected results of the spring wage negotiations are expected to support wages and consumption after the summer. Nomura Japan Chief Economist Kyohei Morita told reporters that the forecast of the Bank of Japan's interest rate hike in October is currently maintained.

"The yen exchange rate will test 160 again. It is expected that the Bank of Japan may intervene at 165 to 170, which will also cause Asian currencies to be collectively under pressure for a while." Liu Yang told reporters.

Offshore RMB approaches 7.3

In the past week (June 17-21), the RMB was weak overall, with a slight depreciation trend for 5 days. In particular, the offshore market fell significantly starting from last Thursday (20th), which led to adjustments in the onshore market, with a weekly depreciation of 0.09%.

Robertson said that the external environment of the RMB may be more uncertain in the next 6 months. "The outlook after the US election depends on who the next president is. At present, we expect President Biden to take an increasingly tough stance on China before the election."

Last week, China released few economic data, and the market focused on the statement of the People's Bank of China at the Lujiazui Forum.

Pan Gongsheng said at the Lujiazui Forum that China has more experience in dealing with fluctuations in the foreign exchange market. This year, the monetary policies of major economies have gradually shifted, the momentum of the appreciation of the US dollar has weakened, and the cyclical differences in monetary policies at home and abroad have tended to converge. These factors work together to maintain the basic stability of the RMB exchange rate and the balance of cross-border capital flows, and expand the operating space of my country's monetary policy. "We insist on the decisive role of the market in the formation of exchange rates and maintain exchange rate flexibility, but at the same time strengthen expectations guidance and resolutely guard against the risk of exchange rate overshooting." Pan Gongsheng said.

"From the statement, expectation stability is still an important consideration for subsequent monetary policy operations. Considering the volatility of the offshore market, it is expected that the central bank will continue to stabilize the onshore market in the short term. However, the short-term trend of the RMB is not expected to be optimistic, and the range this week may be 7.24~7.29. In the near future, we also need to pay attention to the trend of the yen. From the perspective of the yen trend, it has recently returned to around 160, and Japan was again included in the US's monitoring list of exchange rate manipulators on June 20. It is expected that the yen will continue to fall in the short term." Wang Qiangsong, head of the Nanyin Wealth Management Research Department, told reporters.