FX Daily: Tensions over US debt ceiling talks

DXY firms; RMB stays balanced.
Group Research, Philip Wee10 May 2023
    Photo credit: Unsplash Photo

    FX markets were quiet overnight, but DXY firmed above mid-101 as tensions from US debt ceiling talks simmer under the surface. Republican Speaker McCarthy said overnight that there is no progress in talks with President Biden, nor is there agreement for a short-term suspension of the ceiling to provide more time. The “X-date”, when the US Treasury is unable to pay all its obligations, could be as early as 1 June. Market fears of a US default is likely to stir volatility closer to X-date, given risks of the US economy falling off a fiscal cliff. Negotiations may be drawn-out given political grandstanding, or perversely, until market volatility becomes too unbearable. Safe havens such as the JPY or the USD (ironically) could firm in the event of financial volatility stemming from US default risk. 

    Australia’s Budget shows a rare surplus for FY ending June 23, due to windfalls from elevated commodity prices. The budget is seen to revert to a deficit of AUD13.9bn (0.5% of GDP) in FY24, before expanding again to a AUD35.1bn deficit (1.3% of GDP) in FY25. The Labour government’s fiscal restraint is supportive of Australia’s credit rating, though AUD/USD remains little changed at mid-0.67 levels.

    BOJ Governor Ueda said in parliament that the BOJ will end YCC and begin shrinking its balance sheet when the outlook indicates sustainable and stable 2% inflation. While BOJ’s long-term inflation forecasts remain too low to act now, Ueda’ response indicates the likely sequencing in policy actions (with YCC being scrapped first) when the time for normalization arrives. USD/JPY slipped below 135 in response to headlines, but any policy change will likely have to await new forecasts in July.

    China’s export growth moderated in April, but a sharp contraction in imports captured more attention, indicating unexpectedly weak Chinese demand.  Imports of crude oil, copper, and iron have fallen compared to March, suggesting that investment demand is still weak even if consumer spending has picked up. While China’s high trade surplus of USD90bn is supportive of the RMB, equity flows may soften as investors parse a highly uneven demand recovery story post-reopening. The RMB is thus likely to tread water around 6.90 until a broader upturn is seen.

    Chang Wei Liang

    FX & Credit Strategist



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