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USD/SGD RANGE BOUND 1.3240 TO 1.3400
Last week, we saw the USD gaining strong momentum on Thursday (25/05/2023), following the release of FOMC meeting minutes (on 2-3 May). “Participants generally expressed uncertainty about how much more policy tightening may be appropriate,” the minutes said. The minutes also noted that members agreed inflation remains “substantially elevated” relative to the central bank’s goal. This rallied USD/SGD past our previous bias for 1.35 levels as an interim top (as opined in the last market insights), hitting 1.352 levels. At the interim, we see the USD/SGD consolidating, pending more data releases.
We believe that Fed Chair Powell’s speech on 19 May 2023 gave more room for imagination of a possible rate pause in June FOMC (13-14 June) that we opined for earlier. Three important cues: (1) Powell said that stresses in the banking sector could mean that “policy rate may not need to rise as much as it would have otherwise to achieve our goals”; (2) Powell mentioned that tighter credit conditions due to banking stresses are “likely to weigh on economic growth, hiring and inflation”; and (3) He also acknowledged that “as the policy has become more restrictive, the risks of doing too much versus too little are becoming more balanced”. We view Powell’s speech as less hawkish, which played a role initially in dampening USD’s bullish behaviour - both the DXY (dollar index) and USD/SGD - at the start of last week. We retain our bias for USDSGD to trade 1.3240-1.34 post FOMC rate decision.
At this juncture, we opine that a US recession is unlikely this year. The severity of the recession is also dependent on its timing. In a very improbable scenario of a 2023 recession, inflation in 2023 is unlikely to be mild enough for the Fed to cut rates aggressively to stimulate the economy. If a recession were to happen in 2024 or even later, inflation would have fallen to a degree that allows rate cuts to alleviate economic effects.
Elsewhere, headlines concerning to a potential US debt default continue to add FUD (Fear, Uncertainty, and Doubt) to the market as the June 1 deadline nears. US Treasury Secretary Janet Yellen’s warning that failure to raise US debt ceiling would lead to “economic catastrophe”, and the Congress must vote to raise the debt limit before Treasury runs out of cash. She further added that the 1st of June is a hard deadline. We believe that the standoff over the debt limit is a political battle by both sides (Republicans and Democrats) dressed up as substantive. The headline noise of US debt default does not seem to add much significance to any USD directional bias, unless US debt default becomes a fact. Note that the debt ceiling was an artificial limit created during the pre-war days before the USA entered World War II. Since then, the world has changed. Back then, America was a current account surplus nation. Today, it is a current account deficit nation. Politically, we see this as a battle for the Republicans supporters to see the people they rooted for are no pushovers, and for the Democrats, not to see a repeat of Obama’s retreat.
SGD/CNY SUPPORTING AT 5.2160 Moving on to China’s economy, everyone is concerned about the eye-catching headline “deflation issue”, mainly because China’s Consumer Price Index (CPI) increase is close to 0, and the Producer Price Index (PPI) is at a negative. An explanation for this is that although China’s consumption is rising, the production capacity accumulated on the supply side in the early stage is too large. When the economy starts to recover, everyone is hurrying to produce and wants to optimise the excess production capacity as much as possible. However, the demand has not yet fully recovered, and the growth rate, due to the COVID-19 pandemic, has been almost zero in the past three years, so the problem of insufficient demand is still very prominent.
To seize market opportunities, enterprises can only start to cut prices. In this case, PPI will have downward pressure and even enter the negative range. To conclude that China has entered a deflationary spiral, we opine that it is still too early to judge. Only when the CPI is negative for several months can we say that we have entered deflation. Moreover, if there is long-term deflation, consumption must stagnate or even shrink, so that prices will continue to decline. We believe that when consumer demand recovers, it is unlikely that prices will continue to fall for a long time.
We expect that the road to recovery for China’s economy is going to be bumpy, and uneven. Some industries’ recovery is taking off well, such as aviation and tourism. For China’s exports, which everyone is concerned about, we see three new drivers namely – Photovoltaics, Lithium batteries, and Electric vehicles – propelling an average growth of 44.0% per annum from 2017 to 2022. While the growth rate has slowed in the first quarter of this year, it is still as high as 54.5%. The rapid growth of export scale shows that these three new drivers have huge international market demand. Presently, the global emphasis on new energy, and green and low-carbon development is gradually increasing. With the international community accelerating towards carbon-neutral goals, these three new drivers are poised to have a large market space.
At this juncture, we see the support of SGD/CNY at 5.216. Any strengthening of CNY is likely to be driven by green shoots in China’s macroeconomic data, and firmer market sentiments that favour China’s reopening narrative.