Synopsis:

MUFG discusses the recent weakness of the Japanese yen and its potential implications for the Chinese yuan, suggesting that China might allow the yuan to depreciate further in response to Japan's currency movements and domestic economic signals.

Key Points:

• Yen Weakness: The yen has shown significant volatility, recently relinquishing some of its gains, which has pushed USD/JPY back to the 157.00 level. This movement is reminiscent of the patterns observed during Japan's last currency intervention in autumn 2022.

• Implications for the Yuan: The ongoing weakness of the yen is fueling speculation that China may permit a further weakening of the yuan. The People's Bank of China (PBoC) has been adjusting the daily currency fix slightly higher, which has allowed USD/CNY to approach the upper limit of its daily trading band around 7.2480.

• China's Economic Indicators: Recent economic data from China, including softer than expected PMI surveys for April, suggests that the country's economic recovery is losing momentum as it enters Q2. The surveys indicated a particular decline in business confidence in the non-manufacturing sector, raising concerns about the overall health of the Chinese economy.

• Policy Expectations: While there is speculation about further yuan depreciation, MUFG believes that Chinese policymakers are likely to favor a controlled, gradual appreciation of USD/CNY towards the levels seen last year around 7.3000, rather than a sharp, one-off devaluation.

Conclusion:

The recent fluctuations in the yen and emerging economic data from China are contributing to expectations of a potential policy shift that could see a weakening of the yuan.