Asian FX Watch: US Treasury Calls Yuan 'Undervalued' Ahead of Critical Tokyo CPI

The US Treasury Department has officially labeled the Chinese Yuan (CNY) as “substantially undervalued,” urging Beijing to allow appreciation. This verbal intervention adds a layer of diplomatic friction and could increase volatility in USD/CNH as markets weigh the risk of retaliatory currency measures.

Market Snapshots

• Key Risk Event: Looming Tokyo CPI release acting as a leading indicator.
• Currency Tension: USD/CNH faces volatility amid “undervalued” labeling.
• Policy Watch: Bank of Japan under pressure to normalize vs. Fed path.

JPY in Focus

Traders are now turning their attention to the looming Tokyo CPI release. With the Bank of Japan under pressure to normalize policy, a hot inflation print could strengthen the Japanese Yen (JPY), which has been reacting to shifting US yield expectations. The data will cover the Tokyo region excluding fresh food and acts as a leading indicator for national inflation trends.

USD/JPY Outlook

The pair remains sensitive to the divergence between the Fed's potential rate path (awaiting the new Chair nominee) and the BOJ's data-dependence. Any upside surprise in Tokyo inflation could accelerate the unwinding of carry trades, especially given the backdrop of extreme volatility in precious metals and broader dollar weakness.