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Yuan Falls, Yen Struggles Amid Economic Data, BOJ Speculation

Yuan depreciates amid weak economic data and yen's struggle, with China's property sector needing more support.

By Mackenzie Crow

5/16, 23:12 EDT

Key Takeaway

  • Yuan depreciates due to weak economic data and a strong USD/JPY pair, despite PBOC's efforts to stabilize it.
  • Yen's rally potential is undercut by U.S. economic data, with Japan's GDP expected to contract, affecting future BOJ actions.
  • Market anticipates possible BOJ rate hike within three months; yen valuation models suggest 142 to 145 per dollar range.

Yuan Under Pressure

The Chinese Yuan (USD/CNH) experienced an uptick, influenced by a combination of domestic economic data and external currency movements. Recent Chinese economic indicators have failed to instill confidence in a swift recovery, contributing to the Yuan's depreciation. This situation is further compounded by the performance of the USD/JPY pair, which saw an increase following the Bank of Japan's decision to maintain its bond purchase levels. The People's Bank of China (PBOC) has attempted to mitigate short-term fluctuations through its daily fixing, yet the overarching issue of a weakening yen remains beyond its immediate control. Analyst Mary Nicola highlighted the need for additional support in China's property sector in light of the recent economic data.

Yen's Struggle for Rally

The Japanese Yen's potential for a rally was briefly supported by a rally in Treasuries and a subsequent drop in the dollar, as noted by George Lei. However, this relief was short-lived due to the context of recent U.S. economic data. Despite a relatively benign Consumer Price Index (CPI) print, the preceding Producer Price Index (PPI) data and the overall economic landscape do not support a sustained decline in U.S. yields or a further rally in the yen. The near-term outlook suggests a possible retraction in the yen's gains, especially considering the yen's default trend towards weakening. Japan's Gross Domestic Product (GDP) data is anticipated to show a contraction, which could influence the yen's performance depending on the outcome relative to expectations.

Economic Indicators and Market Reactions

Economists are bracing for Japan's GDP report, with predictions pointing towards a shrinkage at an annualized rate of 1.2% in the first quarter. This forecast sets a cautious tone for the yen, as market participants speculate on the Bank of Japan's (BOJ) next moves. The swaps market is currently pricing in a potential rate hike within the next three months, though not as soon as June. Additionally, yen forward points have seen a recovery from late April lows, influenced by shifting expectations for the Federal Reserve's rate cuts and the BOJ's firmer stance on the yen's value. Various models, incorporating factors such as Treasury yields, forward points, and yen swap rates, suggest a yen valuation around 142 to 145 per dollar, indicating the complex interplay of rate expectations and currency performance.