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USD Stays Supported | CNY Lacks Rebound Catalysts

Contributed by Jeff Cheah, Strategic Sales Manager

US Job Market Remains Stable | skip to SGD/CNY

U.S. employers added 187,000 jobs in August as the U.S. job market held steady amid 22-year high-interest rates, according to the U.S. Bureau of Labor Statistics (BLS).

The number of new jobs created in August was the same as in July, suggesting that the labour market, while down to pre-pandemic levels, remains resilient even with high-interest rates.

The Fed is closely watching the labor market and other indicators that indicate whether the economy is slowing, and inflation is falling to its target. The Fed raised interest rates for the 11th time in less than two years in July, raising rates to a range of 5.25% to 5.5%, making mortgage rates and other loans more expensive.

Even at the start of the year, employers were adding a whopping 517,000 jobs per month, as shown in February. But the number of new jobs has slowed over the past few months.

In August, the unemployment rate was 3.8%, the highest level in more than a year. Unemployment has remained relatively steady over the last year, hitting a record low of 3.4% in February before falling again in the spring and summer.

Meanwhile, on last Thursday, the Atlanta Fed president said the Fed's current policy is restrictive enough and core inflation is likely to be close to target, but also warned that the suspension of support does not mean a shift in support.

Atlanta Fed President Bostic said policymakers need to be careful not to tighten monetary policy excessively to avoid unnecessary harm to the U.S. labour market.

The Atlanta Fed president said on Thursday at the South African Reserve Bank's biennial research conference, "Based on the current macroeconomic dynamics, I believe that the current monetary policy has provided appropriate limits, and we should remain cautious and patient and let it continue to affect the economy to avoid the risk of over-tightening and causing unnecessary economic pain."

Bostic, who has been a "dove" in the Fed, did not vote this year. Earlier last month, he said in an interview that he preferred to keep interest rates steady to allow past rate hikes to gradually bring inflation back to the Fed's 2% target.

While urging people to be patient, Bostic also warned, "This does not mean I will support easing policy anytime soon." He did not rule out the possibility of raising interest rates again and emphasized, "If things don't develop as I expect and inflation or inflation expectations suddenly reverse and start to climb, then I will certainly support taking the necessary measures to bring the U.S. economy back to normal." On the road to price stability."

After raising interest rates sharply in 2022, Fed Chairman Jerome Powell and his colleagues have slowed the pace of rate hikes this year and signaled they may be coming to an end. In July, the Federal Reserve decided to raise interest rates by 25 basis points, raising the benchmark interest rate to 5.25%-5.5%, the highest level in 22 years. Their earlier forecasts showed that there will be another interest rate hike this year.

At the Jackson Hole central bank annual meeting two weeks ago, Powell said that inflation remains too high and Fed officials are ready to do more. He said: "We are prepared to raise rates further if appropriate and intend to keep policy at restrictive levels until we are confident that inflation is falling sustainably towards our objective."

At this juncture, we opined for the USD to stay supported, on the back of a resilient US economy. We believe that the Fed will continue to fight inflation to the end, and not be complacent with their rate decisions. We retain our view of a moderate-to-soft dollar outlook, given the Fed is near the end of its tightening cycle.

China Property Contagion

In August, China’s manufacturing purchasing managers’ index (PMI) was 49.7[1], an increase of 0.4 percentage points from the previous month.

The non-manufacturing business activity index was 51.0, down 0.5 percentage points from the previous month, but continued to be in the expansion range.

The manufacturing PMI rebounded for three consecutive months in August. It was believed that the main reason behind the rebound was the clear request of the Political Bureau meeting of the Central Committee on July 24 to "intensify macro-policy regulation and focus on expanding domestic demand."

Meanwhile, we saw slight “tremors” in China’s property sector. Country Garden reports a record RMB 48.9 billion (USD 6.7 billion) loss for the first half of the year. Once China’s largest property developer in terms of sales, the company is struggling to survive the liquidity crisis rocking the country’s real estate sector.

According to Dealogic, Chinese developers face USD 38billion of bond payments, in RMB and dollars, due over the next 4 months. The Chinese government has not announced any bailout measures to date.

We note that the PBOC and the newly established National Administration of Financial Regulation (NAFR) have been checking in with top lenders and leading insurance companies to ascertain their actual exposure to China’s real estate sector – a clear sign that the regulators want to avoid any spillover of the property crisis into the financial and investment industries.

Concerns about China’s slowing growth, coupled with rising credit risks in the property sector, have accentuated poor risk sentiments in China. It sparks worries about potential Japanification. We note that its domestic challenges such as high youth unemployment levels and continued weak sentiments in consumer spending do create anxieties and add pressure to policymakers in Beijing to do more.

At this juncture, we see the support of SGDCNY at 5.3425. Unless risk sentiments on China improve dramatically, and economic fundamentals begin to show gradual and positive upticks, we think there is no policy catalyst at this moment that supports a bias for strengthening the RMB. We believe that RMB bears are still cheering, as the PBoC’s efforts in intervening to back the RMB by draining liquidity have been limited, when not supported by economic fundamentals.


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