Asia FX: Duelling currency wrecking balls

Although there's been an uptick in risk sentiment following softer producer pipeline inflation data, US yields continue to climb, maintaining the US dollar's dominance across G-10 currencies. This week's unexpectedly high  CPI inflation figures have elevated yields, influencing FX  market dynamics.

The resilience of Asian equities is noteworthy, especially considering the stronger US dollar and China's ongoing deflationary challenges. However, the latter has led to calls from China watchers for the PBoC to let the Yuan Yuanen.

This raises concerns about a possible shift in the Asia FX landscape. The continued weakness of the Japanese yen, particularly against the Chinese yuan, is raising questions about its impact on regional trade dynamics. There's a possibility of broader currency devaluations across the region, reminiscent of historical "beggar thy neighbour" policies.

With the US dollar acting as one wrecking ball and the potential for a weaker yuan acting as another, Asian currencies could face significant pressure. While governments may not explicitly endorse such actions, the allure of a weaker exchange rate might lead some to support currency to maintain a competitive trade advantage implicitly.

Therefore, it's crucial to closely monitor movements in the Japanese yen and, particularly, the Chinese yuan. Yuan signs of further yuan depreciation could exacerbate the situation, adding to the challenges faced by Asian currencies.