近期经济观察 – FX rate

USD keeps appreciated after the release of interest rate increase by FOMC on Wednesday last week. The serious attitude from the Fed made the markets adjust their expectation for the interest rate level at the end of this year to be around 4.00% – 4.50% (previous expectation is around 4%). The increase of expectation turned down the equity market in a large percentage.

FX rate becomes also dramatic. The most recent available US dollar index went to be 125 on 16th September 2022. The data after the FOMC will be released this week, and let’s see how the meeting affects the US dollar Index last week.

Clearly, the increase of the USD index is caused by the increase in the US interest rate. USD appreciated are due to not only investors are chasing higher interest rate gains in the US, but also the liquidity gap in USD.

In one of my previous study, I discussed that the Fed keeps QE and QT during the economic cycles to squeeze resources and capitals from all over the world. That results in the magic economic phenomenon in the US currently that high inflation from previous QE and helicopter drops, high interest rate from the Fed, and still very low level of unemployment rate.

  • Could the inflation and high interest rate continue? Maybe Yes.
  • Could the low unemployment rate continue? Maybe No.

China is facing a problem in the domestic market. The gov and CB are struggling with the domestic economy and the foreign exchange. The real estate market seems more vulnerable and more volatile so that CB scarifies the relatively constant FX target, to still hold a low level of interest rate to stimulate investment and domestic mkt.

However, we seem cannot get an obvious react in the short run, the fundamentals still have none improvement. The non-optimistic economic environment reinforces the depreciation of CNY, as I discussed in previous blogs that the growth and prosperity of an economy is another important aspect affecting the FX rate.

Based on above illustrations, I may expect that USD would keep appreciating. Also, the appreciation seems won’t stop if there is not a clear indication of changes in the Fed’s Policy. However, USD appreciation drives capital flowing to the US market, and that is clearly not what every sovereign countries want, because the capital accumulation is moving the US. How could the progress stop? What can we do?