USD/CNH is consolidating around 7.35, with the PBOC having kept its onshore USD/CNY fixing little changed at around 7.18 since December. Governor Pan has said this week that China will mitigate risks of an overshoot in the USD/CNY exchange rate. China has also eased the macroprudential parameter for cross-border financing, which should support more inflows onshore. Given these policy pronouncements, it is likely that China will not allow the RMB to depreciate much in the face of Trump tariffs, which could come as early as next week after his inauguration.
In the US, Bessent’s views at his confirmation hearing for Treasury Secretary are reassuring. He stressed the importance of extending the 2017 tax cuts and mentioned that tariffs will be used for trade negotiations, opening the way for escalating to de-escalate. He also underscored that the US will not default on its debt under his watch and maintained support for Fed independence in monetary policy. Meanwhile, Fed Governor Waller mentioned that the Fed could lower rates again in 1H of 2025 if inflation cools, and that he wouldn’t rule out a rate cut in March. US 10y yields eased to 4.62%, while the USD was a tad softer, with the DXY easing below 109.
Markets are pricing around a 90% chance of a BOJ rate hike next week, with USD/JPY now easing below 155.50. This development should lessen the risk of a sharp unwind in JPY carry trades, helped by an improvement in BOJ communications this week compared to last July, when markets were less sure going into the BOJ meeting. USD/JPY could edge lower towards 154, with a paring of carry trades and a more benign USD environment.
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