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Fed’s Hawks Supported USD | CFETC CNY Basket Buoyant

Contributed by Jeff Cheah, Strategic Sales Manager

Fed’s Hawks Keep USD Supported | skip to SGD/CNY

In the past week, Minneapolis Fed President Neel Kashkari's comments reverberated in the financial world. Kashkari, recognized as one of the more hawkish members of the Federal Reserve, holds significant influence within the Federal Open Market Committee due to his voting rights this year. He emphasized the extraordinary resilience of the U.S. economy and suggested that the Federal Reserve may need to consider further interest rate hikes this year, possibly maintaining higher rates for an extended duration, effectively embracing a "higher for longer" stance.

Kashkari articulated, "If the economy is indeed fundamentally much stronger than we believe, this would imply that interest rates might need to be slightly higher and remain so for an extended period." This perspective emerged two weeks after the Federal Reserve's decision to pause interest rate hikes, effectively stabilizing the federal funds rate within the range of 5.25%-5.5%. Notably, 12 out of 19 officials anticipate additional rate hikes within the year.

Fed Chairman Powell had earlier conveyed that interest rates could potentially remain elevated for an extended duration compared to initial expectations. Less than half of the Federal Reserve officials foresee a rate cut below 5% next year, with one official even suggesting the policy rate could surpass 6% by the end of next year.

Kashkari also disclosed that he was among the 12 officials who forecasted another rate hike within the year during discussions following the Federal Reserve's two-day policy meeting two weeks ago.

Concerning potential future rate cuts, Kashkari mentioned that if inflation cools down as anticipated next year, the Federal Reserve might need to consider rate reductions to ensure that monetary policy remains accommodative. Nevertheless, he expressed surprise at the resilience of consumer spending despite prior rate hikes. He underscored that the entire Federal Reserve Open Market Committee remains steadfast in their commitment to lowering the inflation rate to the 2% target.

Previous data revealed that U.S. inflation experienced a more robust rebound than expected in August, with the Consumer Price Index (CPI) rising by 3.7% year-on-year and core CPI increasing by 4.3% year-on-year. This inflationary pressure was partly attributed to escalating energy costs.

Furthermore, U.S. durable goods orders witnessed a stronger-than-anticipated rise in August, primarily driven by a resurgence in business equipment orders. This suggests that companies continue to prioritize long-term investments despite mounting borrowing costs and economic uncertainties. According to data released by the U.S. Department of Commerce on September 27, durable goods orders in August increased by 0.2% from the initial estimates, surpassing the expected decrease of 0.5%. The previous data was revised downward from a 5.2% decrease to a 5.6% decrease, although military aircraft orders witnessed an approximate 19% surge.

Even when excluding aircraft non-defense capital durable goods orders, U.S. core orders surged by 0.9% in August, significantly exceeding expectations. Although last month's revised data was downwardly adjusted by 0.5 percentage points, it still indicates a potential end to the manufacturing recession. While the manufacturing sector endured a slump for most of the past two years, the pace of decline has notably decelerated. However, it's essential to consider the impact of ongoing factors such as supply chain stability and prices, alongside the ongoing U.S. auto industry strike, which entered its second week.

Amid these developments, the USD continues to find support, underpinned by the hawkish rhetoric from Federal Reserve officials, mounting risk aversion, the robust narrative of U.S. economic growth, and the prospect of higher interest rates for a more extended period.

Encouraging Signs in CFETC RMB Basket

Data released by the China Foreign Exchange Trading Center (CFETC) on September 25 indicates promising trends in the major CNY exchange rate indexes. The CFETC CNY exchange rate index, as of September 22, reported a weekly increase of 0.32, suggesting a broader strengthening of the CNY.

This resurgence follows a period of relative weakness earlier this year and aligns with the continued strength of the USD index. It's noteworthy that the CNY's performance against a basket of currencies plays a vital role alongside its performance against the USD.

Zou Lan, Director of the Monetary Policy Department at the PBoC, emphasized the comprehensive perspective required when discussing exchange rates. Exchange rate fluctuations impact trade, investment, and the balance of payments across multiple countries and currencies. Consequently, changes in the CNY against a basket of currencies provide a more holistic view of its exchange rate dynamics.

In recent months, the CNY exchange rate has shown signs of stabilization and rebound, with spot exchange rates exhibiting an inverted "V" trend. This divergence reflects disparities in economic recovery and shifts in monetary policy cycles. The RMB has notably remained robust against many major non-U.S. currencies, underscoring its resilience.

While the CNY has experienced depreciation against the USD, it has generally remained stable or appreciated against most non-U.S. currencies. This multifaceted view of the RMB's exchange rate dynamics presents a comprehensive picture of its performance.


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