FX Daily: FOMC minutes did not rattle markets

GBP pushing above 1.26; USDCNY unlikely to be eyeing 7
Group Research26 May 2022
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    DXY did not deviate from 102, keeping to a tight 101.6 to 102.4 range for a second session. The “hawkish” FOMC minutes did not wean the US Treasury 2Y and 10Y yields from 2.50% and 2.75% respectively. The minutes affirmed the Fed’s decision to “expeditiously” return the Fed Funds Rate into the 2-3% neutral range with three 50 bps hikes in May, June and July. Although consensus was lacking on the hiking pace (50 bps, 25 bps or pause) at the September meeting, the odds are high for slower GDP growth and higher unemployment rate outlooks in the Summary of Economic Projections. Overall, investors were hopeful that the Fed might not risk a US recession to fight inflation. Dow, S&P 500 and Nasdaq Composite rose 0.6%, 1.0% and 1.5% respectively. Today, consensus is looking for a modest upward adjustment in US’s 1Q22 GDP growth to -1.3% QoQ saar from its advanced estimate of -1.4%. Pay attention to initial jobless claims which have stayed above 200k in the past two out of three weeks. These numbers will not eclipse tomorrow’s PCE deflators for signs of a nascent peak in US inflation.

    GBP to push above 1.2470-1.2600 range towards 1.28. The Bank of England sees the need to keep hiking because of elevated inflation but recession worries have kept the pace to 25 bps. Although consensus predicts two more 25 bps hikes to 1.50% this year, it has also been moving up with the 2Y Gilt yield after each BOE meeting. Like other central banks, we see the bank rate rising above the 2% inflation target.

    CNY depreciated by 0.6% to 6.6931, closing lower from its open for the first time in a week. Premier Li Keqiang warned that China’s economy might contract in 2Q22. The prospect was affirmed by the 4.5% YoY decline in Singapore’s exports to China in April, its first contraction since July 2020, from the disruptions caused by the Covid lockdowns. Real GDP growth slowed to 1.3% QoQ sa in 1Q22 from 1.6% in 4Q21. On 20 May, the central bank (PBOC) lowered the 5Y loan prime rate by 15 bps to 4.60%. Although a weaker CNY is considered positive for exports, China Inc is more concerned about the US and EU economies slowing on the Russia- Ukraine crisis. It also associates a weaker CNY with higher imported costs. For now, we do not see USD/CNY rising to the 7 levels seen during the US-China trade war. The Biden administration is considering lowering US tariffs on Chinese imports which US Trade Representative General Counsel Greta Peisch said might take months to reach a decision. 

    Quote of the day
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    Albert Einstein

    26 May in history
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    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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