The Federal Reserve's interest rate cut has been repeatedly delayed, and it seems that traders have given up on the illusion of betting on Asian currencies in the short term.

On June 21, the central parity rate of the Chinese yuan against the US dollar was reported at 7.1196, depreciating by 4 points, setting a new low in nearly half a year. Despite this, the deviation of the central parity rate from the model is still close to 1000 points (appreciating), indicating the central bank's intention to maintain stability. As of the closing on that day, the exchange rate of US dollar/yuan was 7.2613, close to the 2% fluctuation range, and the US dollar/ offshore yuan was 7.2905, approaching the 7.3 threshold.

In the Asian market, the yuan is not the only one under pressure. As of the 21st, the US dollar/Japanese yen was reported at 159.775, with the yen on the verge of breaking the historical low set in April (160.04). Traders generally believe that the Bank of Japan's delay in raising interest rates again will continue to put pressure on the yen in the short term and suppress the overall sentiment of the Asian foreign exchange market.

It is expected that with the uncertain timing of the Federal Reserve's interest rate cut in the second half of the year and the approaching US election, the pressure on the Asian foreign exchange market is hard to substantially reduce. On the 19th, at the Lujiazui Forum, the Governor of the People's Bank of China, Pan Gongsheng, stated that the yuan exchange rate has maintained basic stability under complex circumstances. This year, the timing of the shift in monetary policy of major developed economies has been continuously adjusted, and the China-US interest rate differential has remained at a relatively high level. We adhere to the decisive role of the market in the exchange rate formation mechanism, but at the same time, we will strengthen expectation guidance and resolutely guard against over-adjustment of the exchange rate.

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The strong US dollar is still difficult to reverse in the short term.

Recent US inflation data has shown signs of decline, but against the backdrop of a strong labor market and sticky core inflation, it is still difficult to change the low expectation of interest rate cuts in the short term, which also leads the US dollar index to approach 106.

On June 12, the US CPI year-on-year increase in May fell from 3.4% to 3.3% (a month-on-month increase of only 0), and the super core CPI monthly rate recorded a negative growth for the first time in two years. However, considering that the Federal Reserve needs to observe data for 2-3 consecutive months, the US dollar index quickly rebounded after falling below 104 in the short term and is now launching an attack on 106 again.

"After several rounds of weakening inflation data and slowing retail sales, the market has returned to the expectation of 1-2 interest rate cuts before the end of the year, but the possibility of a rate cut before September is very small," Matt Weller, Global Research Director of Gain Capital Group, told reporters. Traders estimate that the possibility of the Federal Reserve cutting interest rates at the July interest rate meeting is only 10%. After all, Federal Reserve Chairman Powell still issued a relatively hawkish voice after the June interest rate meeting, emphasizing that recent data has not yet convinced the Federal Reserve that inflation is approaching its target; the Federal Reserve also raised its core PCE inflation forecast for 2024 and 2025.

The euro is also difficult to reverse, further strengthening the US dollar. At the beginning of June, the European Central Bank announced a 25BP interest rate cut, but the uncertainty of the French election has dragged down the euro. "If investors do not reduce the political risk premium, there will not be much room for the euro/dollar to rise. Before the first round of parliamentary voting in France on June 30, it is difficult for the euro to improve," Weller said.

Liu Yang, a foreign exchange expert and General Manager of the Financial Market Business Department of Zhejiang Zhongtuo Group, also told reporters: "The accumulation of European political uncertainty makes it difficult for the euro to strengthen itself. It is estimated to be suppressed by the US dollar in the short term, and the US dollar index seems to be looking up to 107."The Yen Heads Towards a New Low

Recently, the non-US dollar foreign exchange market has been quite weak, especially the currencies of Asia.

"The weakness of Asian currencies has become a focal point of discussion among market participants and policymakers. We have seen Japan's foreign exchange intervention, Indonesia's interest rate hikes to stabilize its currency, and an increase in comments on foreign exchange by policymakers in South Korea and Malaysia," said Eric Robertsen, Global Chief Strategist at Standard Chartered, to reporters.

He believes that for Asian currencies, domestic fundamentals seem to be secondary to external factors. The weakening expectation of interest rate cuts by the Federal Reserve continues to support the strengthening of the US dollar, even though many Asian economies currently have relatively ideal economic growth and inflation. Among emerging market currencies, only the Mexican peso has a positive spot return against the US dollar in 2024, and even the previously favored Indian rupee is still trying to narrow its previous losses against the US dollar.

Robertsen believes that the market will hold its breath until the Federal Reserve believes that the conditions for a rate cut have been met. Until then, the Asian foreign exchange market may still face collective pressure.

This year, the yen has been the weakest major currency in the Asian foreign exchange market. Despite the Bank of Japan's interest rate hike, the yen has continued to decline, breaking through the 160 mark against the US dollar at the end of April. Subsequently, the Bank of Japan intervened in the market, and the US dollar/yen temporarily returned to around 150; at the monetary policy meeting on June 14, the Bank of Japan maintained its target interest rate at 0~0.1%, in line with market expectations, and stated that it would release a plan to reduce the purchase of Japanese government bonds over the next 1~2 years at the July meeting. However, this has not had an effect on the yen's exchange rate, and currently, the yen is about to break through the 160 mark against the US dollar again.

UBS told reporters that the Bank of Japan has shifted from its previous ultra-loose monetary policy to not actively using bond purchases as a quantitative adjustment tool. Quantitative tightening remains a response to sudden interest rate fluctuations and may be carried out in a gradual manner. The institution expects that the Bank of Japan may reduce its monthly bond purchase scale by about 2 trillion yen to 4 trillion yen over the next year. Based on this, the Bank of Japan's government bond holdings will be reduced by about 3% to 5% annually, which may mean that the upward space for 10-year government bond yields will be limited to 10 to 15 basis points.

The reason why the yen is unresponsive, according to UBS, is that the recovery speed of the Japanese economy may not be as expected, so the institution has postponed the timing of the Bank of Japan's first interest rate hike from July to October.

Considering the negative impact of the yen's depreciation on the economy, institutions generally believe that the Bank of Japan may support the yen under political pressure. Policy adjustments such as raising renewable energy charges may hinder the cooling of inflation. At the same time, the results of the spring wage negotiations, which are stronger than expected, are expected to support wages and consumption after the summer. Kyohei Morita, Chief Economist of Nomura Japan, told reporters that he currently maintains the forecast that the Bank of Japan will raise interest rates in October.

"The yen exchange rate is testing 160 again, and it is expected that the Bank of Japan may intervene when it reaches 165~170, which will also lead to a temporary collective pressure on Asian currencies," Liu Yang told reporters.Offshore Yuan Approaches 7.3

In the past week (June 17th to 21st), the Chinese yuan has been generally weak, with a slight depreciation trend over the five days. Particularly starting from last Thursday (20th), the offshore market saw a significant decline, which led to adjustments in the onshore market, resulting in a weekly depreciation of 0.09%.

Robertson stated that the external environment for the yuan may be more uncertain in the next six months, "The outlook after the U.S. election depends on who the next president will be; currently, we anticipate that President Biden will adopt an increasingly tough stance on China before the election."

Last week, China released limited economic data, and the market focused primarily on the stance of the People's Bank of China at the Lujiazui Forum.

Pan Gongsheng said at the Lujiazui Forum that China's experience in dealing with fluctuations in the foreign exchange market has become more abundant. This year, the monetary policies of major economies are gradually shifting, the momentum of the U.S. dollar's appreciation is weakening, and the difference in the monetary policy cycles between domestic and international markets is converging. These factors, working together, are conducive to maintaining the basic stability of the yuan exchange rate and the balance of cross-border capital flows, expanding the operational space for China's monetary policy. "We adhere to the market's decisive role in exchange rate formation, maintain exchange rate flexibility, but at the same time, strengthen expectation guidance and resolutely guard against the risk of exchange rate over-adjustment," Pan Gongsheng stated.

"From the stance, it is clear that stable expectations remain an important consideration for subsequent monetary policy operations. Considering the fluctuations in the offshore market, it is expected that the central bank will continue to stabilize the onshore market in the short term. However, the short-term trend of the yuan is not expected to be optimistic, with this week's range likely to be between 7.24 and 7.29. The recent trend of the Japanese yen also needs close attention. Looking at the yen's movement, it has recently returned to around 160, and on June 20th, Japan was once again included in the U.S.'s currency manipulation surveillance list, suggesting that the yen is likely to continue its downward trend in the short term," Wang Qiangsong, head of the research department at Nanjing Bank Wealth Management, told reporters.