China and Japan take action to target the US dollar.
The remarks made by China and Japan on Monday have had an immediate impact, and traders are weighing the possible measures that both countries may take to prevent further depreciation of their respective currencies.
On Monday, the Chinese yuan and the Japanese yen both rose sharply, while the US dollar experienced its largest decline in two months.
Previously, both China and Japan made statements supporting their respective currencies:
On September 11th, a special meeting on the self-discipline mechanism of the national foreign exchange market was held in Beijing. The meeting emphasized that the financial regulatory authorities have the ability, confidence, and conditions to maintain the basic stability of the renminbi exchange rate. When necessary, they will take action to resolutely correct unilateral and pro-cyclical behaviors, resolutely deal with behaviors that disrupt market order, and resolutely guard against the risk of exchange rate overshooting.
On September 10th, Bank of Japan Governor Haruhiko Kuroda, in his first independent media interview since taking office, pointed out that if the Bank of Japan has confidence that prices and wages will continue to rise, ending the negative interest rate policy is one of the feasible options. Mizuho stated that Bank of Japan Governor Haruhiko Kuroda's comments on wage growth and interest rates imply that the negative interest rate policy may end as early as January.
The Bank of Japan's hawkish turn caused the yen to briefly rise above 146, coupled with significant improvements in China's financial data in August and positive expectations for domestic economic policies. Institutions predict that China's relevant economic data for August will also exceed expectations. This prompted the renminbi to experience a strong rally on Monday, with both onshore and offshore renminbi against the US dollar rebounding by more than 650 points, successively recovering multiple key levels, and also ending one of the longest-lasting upward trends of the US dollar in recent years.
Currently, the US dollar has once again reached a key resistance level.
Although it fell back on Monday, some analysts predict that the interest rate differential between the United States and other countries will continue to put upward pressure on the US dollar, and caution investors against shorting the US dollar.
Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman & Co. (BBH), said:
"As long as there are continued monetary policy divergences, the US dollar will continue to strengthen. Calls for exchange rate appeals and interventions may cause temporary adjustments, but they will not lead to any trend changes."
Over the past two months, the expectation that the Federal Reserve will maintain high interest rates to prevent inflation from rising again, coupled with the better-than-expected performance of the US economy, has led to a strong rally in the US dollar.
In addition, on Wednesday local time, the US will release CPI data for August. If inflation rebounds more than expected, it may prompt the Federal Reserve to reconsider its policy direction, and the short-term downward trend of the US dollar index may also reverse.
Even those who are optimistic about the yen in the medium term advise caution.
UBS Global Wealth Management predicts that the current exchange rate of the yen against the US dollar will rise above 146 and reach 142 by the end of the year. However, the company advises investors to focus on the yen's rise against the euro or the pound, rather than the US dollar, because inflation data and the Federal Reserve's interest rate decision on September 20th may cause volatility in the US dollar. Despite this, the comments from China and Japan had an immediate impact on Monday, with traders weighing the possible measures that both countries may take to prevent further depreciation of their currencies.