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Market Update: USD Momentum, USDSGD Sell-on Rally Call, and China's Economic Concerns

Updated: May 29, 2023

Contributed by Jeff Cheah

Last week, we saw the USD regaining strong momentum, particularly in mid-week. We note that the disappointment in unemployment claims (264k actual vs 245k expected) was insufficient to raise sufficient alarm bells over an impending US recession. Furthermore, we observed job openings (from Indeed Statistics) seem to have stabilized over the month, suggesting that businesses remain relatively buoyant amidst the expectation that bank stresses will take a toll on the US economy. At this juncture, we opine for a sell-on rally call on the USDSGD, looking at the 1.35 levels as an interim top. We see the support at 1.3335/45 levels. Taking stock last Wednesday (17/5/2023), USDCNH broke the key psychological level,7. The implication of this is, it led other USD/AsiaFx currencies to edge higher, with some breaking key price levels. The positive dollar story seems to be preferred by the market at the juncture as investors take a “flight to safety”.

We would like to highlight that last week was a heavy calendar week, with multiple Fed FOMC Members speaking, and a heavy macro-economic data dump from China. This probably added additional volatility to the USD, as a haven currency amid weak China’s economic activity and global growth concerns. We caution our customers to not underestimate sporadic spikes in USD, should risk sentiments continue to stay weak and global growth concerns continue to entrench.

Beyond the immediate global growth concerns, the next rate decision for the US will be the June 13-14 FOMC. At this juncture, we opine that the Fed has absolutely no reason to cut rates while committing to a view of a pause in rate hikes in June FOMC. We believe that US CPI remains flat (CPI y/y actual 4.9% vs previous 5%) – too high, and falling too slowly. With the Fed nearing the end of their tightening cycle following a 25bp hike on 4 May (note: FOMC raised fed funds rate by 5% since March last year), our view of a pause in June is likely to lead to a consolidation of the USD, at this juncture, with USDSGD between 1.3240-1.34 post-FOMC.

Moving on to the CNY, we opine that a weakening China growth momentum does not aid in the rebound of CNY or CNH now. SGDCNY shows strong support at 5.2071, with consolidation likely at this juncture. Unless green shoots in China’s economic data start to surface, we do not expect a significant strengthening of CNY due to weak market sentiments.

Taking stock of China’s slow economic momentum, note China CPI y/y came in softer at 0.1%(vs 0.3% expected). China’s contrasting fortunes between the service and manufacturing sector continues to entrench. The service industry remained in the expansion range for the fourth consecutive month, while the expansion of production, demand, and employment slowed down. While China’s services are doing fine, the question is how long services can continue to expand when manufacturing remains weak. Other Chinese economic data like Fixed Asset Investment ytd/y (4.7% vs 5.7% expected), Industrial Production y/y (5.6% vs 10.9% expected), and retail sales y/y (18.4% vs 22.0% expected) all disappoint.

At this juncture, we expect China to suffer from low inflation and low economic activity, as sluggish economic activity struggles to pick up. The economy remained weak, with export orders down, and few new investments entering China.

China’s CPI figures

China’s PMI figures


*This article here represents the views of CYS and is for informational purposes only, it should not be taken as financial advice. CYS accepts no liability whatsoever for any direct, indirect or consequential losses or damages arising from or in connection with the use or reliance of this publication or its contents.

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