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USD underpinned again on uncertainties and Fed.
Group Research, Philip Wee17 May 2023
    Photo credit: Unsplash Photo

    DXY appreciated 0.2% to 102.6. All DXY components depreciated, led by the SEK (-0.4%), GBP (-0.3%), and JPY (-0.2%). CAD, EUR, and CHF depreciated 0.1%. Global economic worries subdued risk appetite. The US economy was at risk of struggling debt ceiling talks amid waning optimism over China and Germany. On a positive note, Japan’s preliminary GDP growth improved to an annualized 1.6% QoQ sa in 1Q23, double the 0.8% consensus and -0.1% in the previous quarter. The Dow Jones Industrial Average fell 1% to 33012, near the 32938 low on 4 May. Apart from US default risks, the US Treasury 2Y yield rose a third time by 7.2 bps to 4.08% from the Fed keeping the door open for more hikes this year.

    Fed Presidents sent a consistent message that the US hiking cycle did not end at the FOMC meeting on 3 May. Loretta Mester (Cleveland) believed US rates were not at sufficiently restrictive levels for the Fed to hold rates steady. Thomas Barkin (Richmond) needed more convincing that inflation was returning to its 2% target because the labor market had cooled and was not cold. Austan Goolsbee (Chicago) added that service inflation was more persistent than thought. Raphael Bostic (Atlanta) reckoned the Fed was facing the hardest part of reducing inflation which will be slow and bumpy. Fed officials will be looking at incoming data on their rates decision at the FOMC meeting on 14 June.

    EUR/USD depreciated 0.1% to 1.0862. The two factors — a better EU outlook and rising EU rates — that boosted EUR from 1.05 to 1.11 over the past couple of months weakened. Eurozone’s preliminary 1Q23 GDP growth was the same flat 0.1% QoQ sa pace as 4Q22. However, second quarter is not looking good. ZEW Survey Expectations turned negative at -9.4 in May for the first time since December. ZEW President Achim Wambach reckoned the German economy could slip into a mild recession. EUR has been falling after the European Central Bank joined the Fed in delivering a “normal” 25 bps on 4 May. More ECB officials saw the hiking cycle was in the final stretch. EUR needs to trade below 1.08 to extend its fall to the 1.05 lows in early March.

    CNY depreciated 0.4% to 6.9773 per USD. Intra-day, USD/CNY hit a new year’s high of 6.9790. The offshore USD/CNH rate closed at 6.9961, near the psychological 7 level. Investors were disappointed with China’s recovery from its reopening. Although industrial production growth rose from 3.9% YoY in March, the 5.6% growth in April fell short of the 10.9% consensus. Many Southeast Asian traded past key psychological levels. USD/MYR and USD/THB are above 4.50 and 34, respectively. This morning, USD/SGD and USD/PHP are testing 1.34 and 56.

    Quote of the day
    “Our knowledge is a receding mirage in an expanding desert of ignorance.”
         Will Durant

    17 May in history
    The New York Stock Exchange was formed under the Buttonwood Agreement in 1792.

    Philip Wee

    Senior FX Strategist - G3 & Asia

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