FX Daily: USD strength amid robust US data
The USD is well-supported by robust US data. The DXY index had broken above 105 for a short period after the ISM services index showed a rise to 54.5 for Aug, beating expectations significantly. Post yesterday’s data, the Atlanta Fed US GDP nowcast for Q3 stands at a remarkable 5.6% saar, underscoring strong growth despite Fed rate hikes, an elevated USD, and limited spare economic capacity. We shall note that it is extremely rare for quarterly US growth to exceed 5% when the unemployment rate is below 4%. This was last seen in Q2 2000 just prior to the dot-com bubble burst, and in the late 1960s when US potential growth was much higher than today at around 4%.
USD/CNY traded above 7.30, which is not too surprising given the USD surge of late. Importantly, the RMB has remained stable on a trade weighted basis since mid-July and has even appreciated against some Asian currencies. We think RMB depreciation is not aligned with policy intentions, given its limited support for growth and second order impact on Asian currencies, risking competitive depreciation dynamics and an acceleration of capital outflows from the region. Policymakers could thus continue to lean against RMB depreciation pressure, underscored by unwaveringly strong CNY fixings and PBOC’s 200bps cut for banks FX reserve requirement ratio (RRR) last week, which should ease onshore USD liquidity conditions. In the short-term, the RMB could also be supported by a pick-up in equity inflows on measures to support housing, including cuts to mortgage rates and reduction in downpayments.
USD/JPY has inched up towards 148 amid the strong USD. BOJ’s Takata said yesterday that the July YCC tweak was in response to upside price risks, but it is still unclear if rising price expectations are sustainable. It seems that the BOJ could take some time to assess the inflation outlook before deciding on any future policy shifts. Meanwhile, Japan’s top currency official Kanda ratcheted up rhetoric over the JPY, saying that Japan is watching FX markets with a high sense of urgency and will not rule out any options if FX moves continue. The risk of MOF intervention to support JPY has thus increased marginally.
USD/CAD remained steady around mid-1.36 after the BOC held rates unchanged at 5% in line with expectations. The Bank see evidence of an easing in excess demand but remains concerned about the persistence of underlying inflation and is thus prepared to hike rates further if needed.
In Europe, ECB's Knot said that markets could be underestimating the likelihood of a rate increase next week, saying that it will be a close call. Still, we note that Knot is one of ECB’s most hawkish Governing Council members, and EUR/USD has barely reacted to his comment, staying soft at around 1.07.
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