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The DXY’s outlook has become less predictable after its aggressive sell-off in the first half of July. Despite its intention to lower interest rates this year, the Fed lacks the confidence to provide time-based guidance. With the Fed in a blackout period this week, pay attention to Thursday’s US advance GDP and Friday’s PCE deflators to affirm the futures market’s bet for a Fed cut in September.
Given the relatively weaker high-frequency US data in April-June vs. the previous three months, we cannot rule out GDP missing the consensus for growth to improve to an annualized 1.9% QoQ saar in 2Q24 from 1.4% in 1Q24. The Fed will likely consider the PCE headline and core inflation as very good if June repeats the 0% MoM and 0.1% readings in May. However, the Fed appeared more ready to cut rates if the labour market weakened unexpectedly, i.e., the unemployment rate rises to 4.1% in June. Unfortunately, the US monthly jobs report will only be out on August 2, after the FOMC meeting on July 30-31.
The market is also grappling with how a Trump victory in the US Presidential election in November will influence the USD. Those who favour a stronger USD argue that Trump’s trade tariffs on China and tax cut plans will fuel inflation and higher interest rates in America. However, the UK mini-budget crisis in September-October 2022 demonstrated how an unsustainable fiscal situation could hurt a currency. Although Trump’s running mate, JD Vance, called China the biggest threat to the US, Trump would welcome China to build cars in the US and did not like the USD’s strength, especially against the JPY and CNY.
On Friday, we do not rule out the Monetary Authority of Singapore slightly easing the slope of its SGD NEER policy band. We see tomorrow’s MAS Core inflation slowing to 3% YoY in June after holding at 3.1% for three months. If so, core inflation would fall to 3.1% in 2Q24 from 3.3% in 1Q24. CPI and core inflation have been within this year’s official forecast range of 2.5-3.5% since March. According to our model, the SGD NEER has eased from the upper quartile towards the mid-point of its policy band, consistent with the MAS’s comment about core inflation staying on its disinflation path and easing more significantly in 4Q24 before reaching 2% in 2025.
Despite this, USD/SGD is significantly correlated with the DXY Index. In the first half of July, USD/SGD’s fall from 1.36 to 1.34 mirrored the DXY’s drop from 106 to 103.5. To push lower, USD/SGD and the DXY will need the Fed to become more confident about rate cuts.
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Benjamin Graham
22 July in history
In 2019, India's lunar mission, Chandrayaan-2 successfully took off from Satish Dhawan Space Center, Sriharikota aiming to be fourth nation to soft-land on the moon.
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