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USD/SGD Consolidation Ahead of FOMC Decision | SGD/CNY Faces Manufacturing Challenges

USD/SGD Stays Tight Sideways at 1.3240-1.3400 | skip to SGD/CNY

The USD traded relatively mixed last week, with sporadic spikes of volatility. USDSGD remains at resistance levels at 1.3500, likely to stay in the consolidation range between now and to FOMC rate decision.

Fed Governor Philip Jefferson signaled that the June policy meeting is inclined to keep interest rates unchanged, which would give policymakers more time to assess the economic outlook. But not adjusting interest rates, for the time being, does not mean that the cycle of raising interest rates is over. Jefferson, who was recently nominated to be the Fed's vice chairman, said at an event on Wednesday (31/05/2023) that "the decision to keep the policy rate unchanged at the next meeting should not be interpreted as saying that we have reached the peak rate for this cycle."

Another voting member also expressed support for skipping a rate hike in June. "I think we can skip a rate hike and I'm in the pro-pause camp," Philadelphia Fed President Patrick Harker said at an event on Wednesday. U.S. Fed funds futures are now betting on a one-in-three chance the Fed will raise rates in June, down from a 67% chance before Fed Governor Jefferson's speech.

The data released on Friday (26/05/2023) showed that consumer spending remains strong last month, rising 0.8% in April, up from 0.1% gains in February and March, showing recession concerns are not imminent, at least for this year.

Over the past two weeks, some officials have said that inflation and economic activity have not slowed enough to justify an end to rate hikes. But others, including Fed Chairman Jerome Powell, have signaled they may prefer to skip a June hike to assess the impact of past hikes and stress on the banking sector. They can then decide whether to resume raising rates in July. "We have made great strides in tightening policy, the policy stance is restrictive, and we face uncertainty about the lagged effects of the tightening to date and the extent of the credit crunch due to recent banking stress," Powell said two weeks ago at a meeting hosted by the central bank.

We observed that the Fed uses interest rates policy language - through the speeches they give - to affect interest rates in the open market, with the various Fed officials coming out to make proclamations to massage the market in whatever direction they want. We would like to highlight between now and the FOMC rate decision the next week (13-14th June) is the FOMC trading and external communications blackout calendar, with no Fed, speaks allowed. We expect markets to continue to trade sideways in anticipation of FOMC next week.

At this juncture, we remain committed to our view of a pause in rate hikes in June FOMC next week. 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. We retain our bias for USDSGD to trade 1.3240-1.34 post-FOMC rate decision.

SGD/CNY Finds Support at 5.2368

Moving to China, we see disappointment in China’s manufacturing PMI, and non-manufacturing PMI data released last Wednesday (31/05/2023). Manufacturing PMI came in softer than expected (Actual: 48.8 vsExpected: 49). Non-manufacturing PMI also came in softer (Actual: 54.5 vs Expected: 55.1). We observed that insufficient demand is prominent, and structural differential is obvious.

Enterprise surveys show the proportion of enterprises reflecting insufficient market demand in May has further increased to 58.8% based on the April data hitting a new high in nearly three years, setting a record high. From a structural point of view, the PMI of large enterprises turned from a decline to an increase, up 0.7 percentage points from the previous month to 50.0%, while the PMI of small and medium-sized enterprises fell further, down 1.6 and 1.1 percentage points to 47.6% and 47.9%, respectively.

In addition, from January to April 2023, the profit of industrial enterprises declined -20.6% year-on-year, a decrease of 0.8% from the previous month. We opined that insufficient demand is still the main constraint. Overall, the decline in the profits of industrial enterprises has narrowed, mainly driven by the accelerated growth of "volume", while price factors and costs still significantly drag down the performance of corporate profits.

In the broader context of sluggish profit growth, the expansion of assets of industrial enterprises has further slowed down, thereby affecting the ability and willingness to expand employment opportunities. From January to April, the liability-asset ratio of industrial enterprises further increased by 0.2% to 57.3%, hitting a new high since June 2015.

The growth rates of total assets and total liabilities both declined for the second consecutive month, to 7.3% and 7.8% y/y respectively. Since May last year, the asset expansion speed of industrial enterprises has been significantly slower than the debt expansion speed, which is a reversal from the previous situation, resulting in an increase in the liability-asset ratio.

Against the backdrop of continuous y/y contraction in industrial corporate profits, corporate asset expansion will be weak, while the macroeconomic policy environment of "stabilising credit" has supported relatively rapid debt expansion. The persistence of credit expansion may cause negative implications.

We also observed that the inventory level of industrial enterprises is relatively high, which needs to be eliminated. From January to April, the finished goods inventory of industrial enterprises decreased significantly by 3.2% to 5.9%, but this is related to the decline in industrial product prices. Although the finished goods inventory after deducting PPI also fell year-on-year, it is still in a relatively high fluctuation range since 2022.

At the same time, the turnover days of finished products measured by the ratio of finished product inventory to main business cost is still as high as 20.8 days, which reflects that the inventory level of industrial enterprises is still high, which hurts the growth of industrial production.

Overall, a combination of weak investor sentiments, a lack of green shoots in macroeconomic data, and a seemingly lacklustre employment landscape (thereby affecting consumption) are likely to drag on the CNY performance. At this juncture, we see the support of SGDCNY at 5.2368 levels in the interim.

Contributed by Jeff Cheah, Strategic Sales Manager

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