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USD/SGD Bearish Outlook if Fed Pauses Rates, while Weak Demand Drives CNY Weakness

Contributed by Jeff Cheah, Strategic Sales Manager

USD/SGD Bearish If Fed Pauses Rates | skip to SGD/CNY

Last week, we saw the USD giving up much of its earlier gains, with the USD/SGD losing momentum. Before the FOMC rate decision, we see the USD/SGD having a resistance of 1.3520 with a support at 1.3420. As we have opined in the previous Market Insight, last week and this week is the Fed calendar’s blackout week with no Fed speaks. Consequentially, we expect a quieter market with no major speeches to push the market in any directional bias which may lead to mixed behaviour of the USD.

We see some dichotomous data in the US economy, when the US non-farm employment change came in firmer than expected at 339k (vs 195k expected). However, unemployment rate rose slightly to 3.7% (vs 3.4% previous). Jolts job opening also showed firmer data at 10.1M (vs 9.41M expected). This reflects a tight labour market, with a lack of labour supply evident.

The key risk event this week is the FOMC rate decision on June 13-14. At this juncture, we continue to favour a pause in the rate decision. Looking beyond, the upside bias for USD is likely to be limited, given that the Fed is near the end of its tightening cycle, and the Fed and markets are looking for rate cuts into 2024 and 2025. The risk for USD remains skewed to downside at this moment. We are bearish on the USD if the Fed pause rate. At this juncture, we opine for the USD/SGD breaching key support levels of 1.34 post FOMC rate decision, and trade south of 1.34 after 13-14 June.

It is also worth noting well-known investor, Mohamed El-Erian’s, CNBC remarks on Friday (04/06/2023). He commented that Fed’s hint of a pause in raising interest rates was given too early. He questioned why the Fed is so strongly leading the market to think that a rate hike will be skipped before this non-farm payroll report and the next CPI release. El-Erian also pointed out that this is the 14th consecutive data that has been stronger than expected, and that the U.S. economy remains the main engine of job creation, which is good news. "I'm deluding myself to think that a month of data is going to make a big difference, but that's how the Fed has steered the market before, and it's a disgrace," he said. El-Erian is concerned that Fed officials are pushing the economy into recession, first because the Fed lacks a strategic vision and an effective monetary framework, and second because they set the wrong inflation target. The third is that they are trying to restore their credibility.

SGD/CNY Weak Demand Leads to CNY Weakness

Meanwhile, in China, the General Administration of Customs released data on last Wednesday that, in terms of U.S. dollars, China’s exports fell by 7.5% y/y in May, turning negative again after two months, and imports fell by 4.5% y/y, a drop of 3.4 percentage points from the previous month.

The lackluster data in imports can be attributed to weak demand. On the other hand, the drop in commodity prices has led to a continued decline in the value of related imported products. With slowing demand in Europe and the United States, exports remain sluggish, leading to weak processing trade, thereby affecting processing trade imports.

We observed that there was a significant adjustment in the CNY exchange rate in May. Due to the short-term strengthening of the USD and fluctuations in individual economic indicators, it does have an impact on the trading sentiments in the FX market.

The weak demand for CNY by market players has also led to the weakness of the CNY itself. We see CNY struggling to regain any positive appreciation momentum in the interim. We see the support for SGD/CNY at the interim to be at 5.2751.

Exchange rate market mainly depends on economic fundamentals. Although the current market has some differences in expectations on the slope of future domestic economic recovery, the basic consensus is that the world’s economy is facing downside risks, and China's economy is expected to recover in general.

On May 18, it was reported that the first meeting of the China Foreign Exchange Steering Committee (CFXC) in 2023 was held in Beijing. The meeting pointed out that at present, China's macroeconomic market, balance of payments market, and foreign exchange reserves market are stable, and financial institutions, enterprises, and residents generally have stable expectations for exchange rates, which are a solid foundation and strong guarantee for the smooth operation of the foreign exchange market.

We observed in the first quarter of 2023, among the hedging announcements issued by listed companies, that 277 companies were involved exchange rate hedging, a y/y increase of 13.5% and a m/m increase of 45%. The willingness and actions of listed companies to participate in exchange rate hedging continued to increase.

The moderate adjustment of the CNY exchange rate is expected to benefit export-oriented enterprises. The depreciation of CNY exchange rate can reduce the price of Chinese domestic products relative to foreign products and enhance product competitiveness. The appreciation of foreign currency leads to an increase in the settlement price, an increase in CNY income, and an increase in gross profit margin. In addition, the exchange gains resulting from exchange rate fluctuations are included in financial expenses, affecting current net profit.

China Foreign Exchange Market Steering Committee pointed out that at the next stage, the People's Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) will strengthen supervision, monitoring, and analysis, as well as guidance on expectations, and correct pro-cyclical and unilateral behaviour when necessary, and curb speculation.

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