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USD 2-Way Risk | CNY Looks Flat

A report by CYS Global Remit Strategic Sales Management Team

Fed’s Nov FOMC Pause Expected | skip to SGD/CNY

The latest data released last Tuesday showed that U.S. retail sales recorded a monthly rate of 0.7% in September, more than double Wall Street’s 0.3% growth forecast, reflecting the resilience of the US economy. Sales excluding autos and natural gas rose 0.6%, above the 0.1% growth forecast compiled by Bloomberg. Meanwhile, August sales were revised up to a 0.8% increase from the previously reported 0.6% increase.

The September report from the U.S. Commerce Department provided a snapshot of consumer spending, with economic data still much stronger than expected. While wage growth is starting to lose momentum, the labor market remains generally strong, giving Americans room to continue spending. With September price data showing stubborn inflation, continued strong consumer demand may prompt the Federal Reserve to raise interest rates again before the end of the year.

While inflation data has been improving recently, U.S. Treasury yields have been surging, sending conflicting signals about the direction of monetary policy. Markets largely expect the Fed to keep rates on hold,

The Federal Reserve stabilized interest rates at 5.25%-5.5% at its September meeting, but the possibility of raising interest rates by another 25 basis points at its December meeting still exists.

"Higher for longer" has become an unofficial slogan in recent weeks, with Philadelphia Fed President Harker specifically mentioning the term earlier last week to express his views on the outlook for monetary policy.

Harker and several other Fed officials have advocated holding off on raising interest rates at least for the near future to weigh the impact of incoming data. Fed Vice Chairman Jefferson and Governor Waller also spoke earlier this month. Waller said the Fed could "wait and see" before further adjusting interest rates.

Federal Reserve Chairman Jerome Powell capped off last week by reaffirming the expectation of a pause in Nov FOMC. He also acknowledges recent signs of cooling inflation but said the central bank would be "resolute" in meeting its 2% target.

In his widely watched speech to the Economic Club of New York, Powell avoided committing to a specific policy path but did not indicate his preference to continue raising interest rates.

As Powell spoke, futures market traders completely ruled out a November rate hike and reduced the chance of a December hike. Powell acknowledged progress in reducing inflation to manageable levels but stressed the need for vigilance in achieving the central bank's goals.

"Inflation remains too high, and several months of good data are just the beginning of building confidence that inflation is continuing to decline toward our goals," Powell said in prepared remarks. "We cannot yet know how long these lower readings will persist, or where inflation will settle over coming quarters?"

He added: "While the road may be bumpy and take some time, my colleagues and I are united in our commitment to sustainably lower inflation to 2%."

We continue to hold the view that even if the Fed completes raising interest rates, it is unlikely that Fed officials will formally announce a halt to rate hikes. After all, the Fed has repeatedly surprised itself with the economy's resilience and is more willing to leave the door open to further rate hikes.

In last week’s market insights, we flagged the Fed’s dovish pivot as something that USD bears will be watching closely. We continue to watch closely for USD pullback, as less hawkish Fed rhetoric sinks in. For now, investors’ risk aversion and risk-off sentiments with the Israel-Hamas conflict still in the headlines are likely to favor the safe havens like USD, and JPY, making USD the preferred bid in the interim.

China's Property Woes Deepen

Recent data has revealed that despite regulatory efforts to bolster the real estate market, its ongoing decline is continuing to impact the economy. Real estate investment, a key economic driver, saw a 9.1% year-on-year decline from January to September, surpassing the previous eight-month drop of 8.8%[1]. Home sales have also slumped, down 3.2% for the year, while new construction starts have plummeted by 24% during the same period.

Adding to the woes of cash-strapped developers is a 13.5% year-on-year fall in real estate development funds for the first nine months of the year, following a 12.9% decline from January to August. Notably, Country Garden, once the country's largest developer, faces an impending default as the grace period for bond payment terms expires, intensifying financial pressures.

These setbacks in real estate investment and sales, amid otherwise positive national economic data, highlight the urgency of stronger measures to address the housing crisis. Yet, the outlook remains uncertain, with questions surrounding the effectiveness of potential stimulus measures. Factors like an aging population, persistent domestic unemployment, and limited affordability among buyers complicate the recovery of the property market.

Adding to the uncertainty, Country Garden must meet a $15.4 million U.S. dollar bond coupon payment before the end of a 30-day grace period from October 17 to 18, or risk default.[2] Meanwhile, Evergrande faces the grim prospect of asset liquidation in an upcoming court hearing on October 30, as it strives to finalize a restructuring plan to repay creditors.

Since the start of 2018, aside from select areas in first-tier cities, most of the real estate industry has experienced a downturn. Rising property prices have left many individuals who previously bought homes feeling trapped by high costs. The ongoing pandemic has exacerbated issues for various real estate companies, leading to severe cash flow problems.

The real estate industry's challenges persist despite government efforts, including reduced mortgage interest rates, lower payment requirements, and the latest policy recognizing homes without loan approval. This inability to reverse the industry's decline can be attributed to several key factors.

Firstly, the real estate bubble has grown excessively, especially since 2016, with soaring housing prices. Many saw housing not just as a place to live but as an investment to increase their wealth. However, this led to an oversupply of housing units, exceeding demand, and driving up vacancy rates.

Secondly, due to the significant role of real estate in individuals' asset portfolios, reducing housing prices could lead to asset depreciation. Approximately 60% of people in China have a substantial portion of their wealth tied up in real estate. A sudden price drop would unsettle those who invested heavily in property and could pose a risk to social stability, a top priority for the party leadership.

Lastly, many local economies rely heavily on the real estate market. In numerous cities, GDP primarily stems from real estate, as alternative industries for economic growth are lacking. Education and real estate are closely connected, driving local development.

Changsha, the capital of Hunan province, stands out as a city with a distinct growth model that isn't overly reliant on real estate.[3] Its GDP surpassed the "Trillion GDP" threshold in 2017, and it continues to climb in national rankings. In the first half of this year, Changsha's enterprises above a designated size saw a 3.9% increase in added value, with high-tech manufacturing surging by 20.1% year-on-year. Changsha hosts four of the world's top 50 construction machinery companies, establishing a thriving industrial cluster worth hundreds of billions.

At present, the RMB is expected to consolidate in terms of price action, awaiting signs of economic improvement that would justify its strengthening, contingent on more favorable data revealing improving fundamentals.

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