Global Courant
The People’s Bank of China set the midpoint of yuan trading on June 28 at an eight-month low.
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Top currency officials in Asia are pushing back bets that sent their currency to its seven-month low this week, further compounding their underperformance for the year.
Japanese financial officials have been warning all week about the “excessive” depreciation of the Japanese Yen. On Tuesday night, Malaysian officials expressed similar concerns for the ringgitwhile China the yuan three times this week at a stronger-than-expected daily rate to support the currency.
Opposite movements in the world’s major currencies – including the Japanese yen, Chinese yuan and the US dollar – underline differences in domestic interest rates and monetary policy cycles. It’s because central banks around the world are still dealing with sticky inflation, weakening growth in the wake of Covid-19, Russia’s war on Ukraine and an energy crisis.
Since the start of the year, the Japanese yen is down more than 9% against the US dollar, while the Malaysian ringgit is down about 6% and the Chinese yuan is down almost 5%. All three currencies tested seven-month lows against the US dollar this month and are among the most battered in Asia this year.
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The risk of Japan’s finance ministry intervening in the forex market has increased, Carol Kong, an economist and currency strategist at the Commonwealth Bank of Australia, said in a note Wednesday. Authorities could buy the Japanese yen “with USD/JPY rising to continue,” she added.
“However, we find that the speed of change, not the level, is most important in the Treasury Department’s decision to intervene,” Kong said. “Potential Forex Intervention May Add to Japanese Yen Volatility.”
A policy divergence between the extremely accommodative monetary policy of the Bank of Japan and the US Federal Reserve’s aggressive tightening against inflation is driving the strength of the US dollar.
“We are closely monitoring currency movements with a strong sense of urgency,” Reuters said reported Wednesday, citing Masato Kanda, Japan’s top currency diplomat, who repeated his comments from Monday. “We will respond appropriately if it becomes excessive.”
Finance Minister Shunichi Suzuki said Tuesday there were “sharp and unilateral moves” in the yen’s fall, which could warrant appropriate action by Japanese authorities if the trend turned excessive, Reuters reported.
The risk of yen intervention is high as the currency trades in the 145-150 yen against the US dollar, DBS senior forex strategist Philip Wee said in a Wednesday note. The Japanese currency hovered around 144 against the dollar in Asian trading on Thursday.
Last year, the Japanese Ministry of Finance intervened with about $68 billion to support the yen on three separate days: Sept. 22, Oct. 21, and Oct. 24 — when the currency traded 150 against the greenback and weakened to levels not seen since 1990.
Malaysian objections
This is reported by the Central Bank of Malaysia late on Tuesday that “the magnitude of the ringgit’s recent depreciation is not a reflection of Malaysia’s economic fundamentals.”
“Bank Negara Malaysia will intervene in the currency market to halt currency movements deemed excessive,” Deputy Governor Adnan Zaylani said in the statement.
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“While the value of the ringgit will remain market-driven, BNM expects the government’s continued measures to further strengthen the economy will help ensure that the ringgit better reflects the country’s fundamentals,” he added. please.
The central bank said further clarity on interest rates from the US Federal Reserve and possible positive signs of stimulus from China could provide support for the ringgit and Asian currencies in general.
In a customer note on Wednesday, Goldman Sachs economists pointed to the deterioration of Malaysia’s broad balance of payments — driven by a large increase in outward foreign direct investment, investment income outflows and bond outflows — as a key reason for the ringgit’s weakness.
“In any case, we think the Central Bank will only step in to reduce volatility, rather than trying to change USD/MYR’s broader direction,” they added.
Chinese yuan support
The People’s Bank of China has so far set stronger-than-expected daily reference rates for the Chinese yuan on three of the four days this week, stretching the limits of tolerance to the depreciation.
The PBOC’s daily midpoint for the onshore yuan is being closely watched for clues as to its official stance on yuan movements. The central bank allows the currency to trade within a narrow band of 2% from the midpoint of each day.
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On Thursday, the PBOC set its daily mid-point reference rate for its managed currency at 7.2208 yuan per US dollar, versus a Reuters estimate of 7.254 yuan per US dollar. The yuan changed little in Asian trading by midmorning, hovering around 7.247 against the dollar.
The Chinese government has so far been cautious with its economic stimulus measures slowing growth in the second largest economy in the world. Official data on Wednesday showed cumulative profits of Chinese industrial companies fell 18.8% in the first five months of 2023, adding to the gloom.
“Empirical experience of post-intervention currency performance suggests that central bank resistance works at best to slow the momentum of currency movements, but does little to reverse the trend,” JP Morgan economists wrote in a Wednesday note.
“As growth pessimism and widening yield differentials are at the core of CNY weakness, the return of CNY strength requires these two fundamental headwinds to abate more sustainably,” they added.
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