Renewed Strength for CNY and JPY: Central Bank Signals and Verbal Intervention Provide Stability

Switching gears and talking about the Asian currency markets, the Chinese renminbi (CNY) has staged a remarkable rebound after experiencing a downturn towards the end of the previous week. This resurgence has led to a decline in the USD/CNY pair, edging it closer to the pivotal 7.2000-level. Driving this upward momentum was a notable move by the People's Bank of China (PBoC), which set a daily fix for USD/CNY at 7.0996, surpassing expectations and marking a decrease from Friday's fix at 7.1004. This proactive stance from the PBoC has served to quell immediate concerns regarding a deliberate devaluation of the currency, reaffirming their commitment to stability.

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Speculation had intensified recently regarding a potential downward adjustment for the renminbi, particularly following the PBoC's decision to raise the daily fix by 0.0062 to 7.1004 last Friday. This move had propelled USD/CNY beyond the 7.2000 resistance level for the first time since mid-November, coinciding with a broader resurgence of the US dollar in recent weeks. Factors contributing to the dollar's strength included anticipations of monetary easing abroad, notably evidenced by the Swiss National Bank's rate cut and a dovish shift in policy guidance from the Bank of England. Despite these fluctuations, the likelihood of USD/CNY revisiting highs from the previous year, around the 7.3000-level, remains uncertain, with Chinese policymakers emphasizing the importance of maintaining currency stability.

Similarly, the Japanese yen (JPY) has faced downward pressure despite the Bank of Japan's (BoJ) decision to tighten monetary policy in response to rising inflation. This move, signalling an end to negative rate policies and yield curve control, has seen USD/JPY nearing highs observed over the past couple of years, approaching the 152.00-level. Concerns over yen weakness echo sentiments expressed by Japanese policymakers in previous years, prompting considerations of intervention to support the currency. 

The decision to intervene in 2022 yielded a temporary rebound, while abstaining from intervention in 2023 coincided with market speculation over Fed rate cuts, leading to yen appreciation.

With market expectations recalibrating towards stronger US inflation data and the Fed's commitment to multiple rates cuts this year with the first one most probably starting at mid of this year in June, Japanese officials are once again contemplating verbal intervention to curb further upside for USD/JPY. Masato Kanda, Japan's top currency official, emphasized that the recent yen depreciation is disproportionate to underlying fundamentals, attributing it to speculative forces. He iterated Japan's readiness to take appropriate measures to counter excessive fluctuations, including direct intervention if necessary. Highlighting the unusually large 4% fluctuation in USD/JPY over a mere two weeks, Kanda underscored the divergence from fundamentals, signalling Japan's vigilance in maintaining currency stability amidst market turbulence.

In summary, the recent dynamics in both the CNY and JPY underscore the significance of central bank actions and verbal interventions in stabilizing currency markets amidst evolving economic landscapes and speculative pressures.

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