FX Daily: Mixed on Monday on US debt ceiling hopes

Beyond US debt ceiling hopes, focus is back on monetary policy again
Group Research, Philip Wee30 May 2023
    Photo credit: Unsplash Photo

    European and Asian markets were mixed during Monday’s US Memorial Day holiday over hopes for a resolution to the US debt ceiling crisis. Euro Stoxx 50 Index fell 0.4% while the FTSE 100 Index rallied 0.7%. Japan’s Nikkei 225 index rose 1% to 1990 highs, while China’s CSI 300 index fell 0.4% to a new year’s low. The USD Index (DXY) held the same 104.2 level as Friday. Gains in the CAD (+0.2%), CHF (+0.2%), JPY (+0.1%), and GBP (+0.1%) were offset by losses in the EUR (-0.1%), the DXY’s most significant component. EUR’s rally on the US debt ceiling resolution hopes petered out at 1.7044 during Asia hours before returning lower to Friday’s lows around 1.0710. The EU 2Y bond yield eased 6.2 bps to 2.88%, its first fall in six sessions. Although European Central Bank officials have been paving the ground for two more hikes in June and July, they also acknowledged that the tightening cycle was having an impact and near a pause.

    Today, the US House Rules panel will discuss the debt ceiling Bill agreed in principle by the US President Joe Biden and House Speaker Kevin McCarthy over the weekend. Both leaders are confident they will get the votes in the House of Representatives to suspend the debt ceiling until the first quarter of 2025 and avert a debt default on 5 June (X-date).

    Except for the CNY, most Northeast Asian currencies fared better than their Southeast Asian peersPHP depreciated most by 0.6% to 56.13, near the year’s high of 56.4 on 20 April. Bangko Sentral ng Pilipinas (BSP) is looking to lower the banks’ reserve requirement ratio after it hiking cycle paused on 18 May. Yesterday, BSP Governor Felipe Medalla projected CPI inflation cooling from 6.6% YoY in April to below 4% in September/October and below 2% in January 2023. USD/SGD rose 0.1% to 1.3536, near the year’s high (1.3576 on 10 March) for a third session. Per our model, the SGD NEER has been holding below 1% from the mid-point of its policy band after last month’s pause in the tightening cycle. Although Singapore’s CPI inflation rose to 5.7% YoY in April from 5.5% in March, it was near the floor of the official forecast of 5.5-6.5% for 2023. In month-on-month terms, headline inflation fell to 0.1% MoM from 0.5%. Core inflation was flat MoM, keeping April at the same 5% YoY pace as March.

    Commodity currencies benefited from the improved risk appetite. AUD, CAD, and NZD appreciated by 0.3%, 0.2%, and 0.1%, respectively. The market is not ruling out a rate hike at the Reserve Bank of Australia meeting on 6 June. RBA hiked again in May after a pause in April and has warned the Labour Party MPs that their support for generous wage hikes could fuel inflation. The Bank of Canada could surprise at its meeting on 7 June despite the consensus for rates to be left unchanged at 4.5% for a third time. BOC said it considered hiking in April and warned earlier this month that inflation could be stuck materially above target. NZD has been underperforming after the Reserve Bank of New Zealand maintained its forecast for rates to peak at 5.5% this year, the level achieved by the 25 bps hike on 24 May.

    Quote of the day
    “A lean compromise is better than a fat lawsuit.”
         George Herbert

    30 May in history
    Spain joined NATO in 1982.

    Philip Wee

    Senior FX Strategist - G3 & Asia

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