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USD Strength Unlikely to Fade while CNY Headwinds Continue

Contributed by Jeff Cheah, Strategic Sales Manager

Waiting for Catalyst for a Firmer Dollar | skip to SGD/CNY

Latest data showed U.S. inflation cooled in May, with consumer spending rising for a fifth straight month, evident that the U.S. economy remains resilient.

According to a report released by the US Department of Commerce on Friday, consumer spending, the main driver of economic growth, increased by 0.1% m/m in May, compared with a revised 0.6% increase in April and an expected 0.2% increase.

Specifically, Americans are spending more on services like healthcare and air travel, while spending on goods such as cars has fallen. Adjusted for inflation, spending rose 0% m/m in May.

As the Fed's favorite inflation indicator, the personal consumption expenditures (PCE) price index rose 3.8% y/y in May, down from 4.3% in April, and fell below 4% for the first time since April 2021. After excluding the volatile food and energy prices, the core PCE for the month was 4.6% y/y, slightly lower than the previous value of 4.7%. Economists believe that core inflation is a better predictor of future prices than headline inflation.

From a month-on-month perspective, the overall PCE index rose by 0.1% in May, in line with expectations, a significant slowdown from the previous 0.4%.

Fed officials have been paying particular attention to prices in labor-intensive services. They argue that the category, which excludes food, energy, housing, and commodities, can shed light on whether wage pressures in the labor market are passing through to consumer prices, especially against a backdrop of expected moderation in housing and commodity price increases.

We saw ISM Manufacturing PMI data coming in softer at contraction territory at 46.0 (vs 47.2 expected). The combination of softer inflation and softer ISM Manufacturing PMI are likely to curb USD’s bullish momentum until more economic data releases or Fedspeaks take over a catalyst for a firmer dollar.

In the early hours of July 6, the Federal Reserve released the minutes of the June Federal Open Market Committee (FOMC) policy meeting, showing that some Fed officials had considered supporting a rate hike in June, further confirming the Fed's hawkish stance.

The Fed is considering whether to resume raising interest rates at its July meeting. At this juncture, we remain biased to a 25bp rate hike in Fed’s July FOMC. That expectation should set the tone for bullish USD outlook which we have consistently gravitated towards for the past few editions of market insights.

China's Economy Growth Momentum Not Strong

Moving on to China, China's June manufacturing PMI comes in at 49, still in the contraction range, but slightly increased by 0.2 percentage points from the previous month, and the production and new order indexes recovered simultaneously.

On the other hand, non-manufacturing expansion momentum slowed down. The non-manufacturing business activity index was 53.2%, a decrease of 1.3 percentage points from the previous month; while the new order index remained flat at 49.5, continuing the contraction.

China's economy is still showing a combination of "manufacturing contraction - service sector expansion", but the gap shows signs of bridging. Manufacturing production has stabilized at a low level.

In the manufacturing industry[1], the midstream equipment manufacturing industry has the best times, while the raw material industry is the main drag. Three observations: - First, the PMIs of equipment manufacturing and high-tech manufacturing in June were 50.9% and 51.2% respectively, both in the expansion range and rebounding for two consecutive months. In particular, the production and new order indexes of the four industries of automobiles, railway ships, aerospace equipment, electrical machinery equipment, and computer communication and electronic equipment are all in the expansion range.

However, the profits of the computer communications and other electronic equipment manufacturing industries in the first five months fell by 50% compared with the same period last year. After the production margin stabilized, the pass-through to profits and investment will take time.

Second, the PMI of the consumer goods industry in June was 50.7%, the expansion rate slowed down slightly, and the recovery of residents' demand for goods was not strong.

Three, high energy-consuming industries are still the main drag. The PMI in June was 46.6%, which is at a contraction range. However, its PMI has increased as compared with the previous month, and the overall drag on the manufacturing industry has weakened marginally.

In the service industry, the digital economy, transportation logistics and finance performed well, while real estate services continued to shrink. In terms of industries, the business activity index of air transportation, postal express delivery, telecommunications, broadcasting, television and satellite transmission services, monetary and financial services and insurance are in the high-level expansion range of 60.0% and above.

The business activity expectation indexes of railway transportation, air transportation, catering, telecommunications, radio and television, and satellite transmission services are all higher than 67.0%, and the industry development is expected to continue to improve.

Overall, the current growth momentum of China's economy is not strong. The recovery of the construction industry is affected by uneven growth in the real estate industry. The service industry’s recovery is slowing down, while the manufacturing sector continues to struggle. Against the backdrop of a weak economic recovery, the employment indexes of the three major industries of manufacturing, service and construction have simultaneously declined, and the overall pressure to stabilize employment still exists. At this juncture, we see the support of SGD/CNY at 5.3359. Sources:

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