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Market sentiment has improved with Powell staying on as Fed Chair despite incessant Trump pressure, supporting a USD recovery back to Wednesday’s level and lifting the S&P500 to a new record close. Meanwhile, Fed Governor Waller (who is a potential candidate for Fed Chair) had stated that the Fed should cut rates by 25bps this month to give a little more stimulus, as risks to the Fed’s employment mandate has increased. Waller’s position indicates differences in opinions across Fed officials on the impact of tariffs on inflation, but the Fed’s July Beige Book released yesterday confirmed that many businesses are passing on at least a portion of cost increases from tariffs to consumers, either through price hikes or surcharges. Whether second-round effects will be significant are the next to watch.
USD/CNH is consolidating around 7.18 in line with broader USD trends, but the PBOC’s USD/CNY fixing has drifted lower to below 7.15. Policymakers may be more confident after China posted solid Q2 growth of 5.2%, and allowing a firmer RMB would also mean that currency issues would be less of a bugbear in trade negotiations with the US. Washington’s tone towards US-China trade has also noticeably softened, with the White House now reversing its stance and allowing Nvidia to resume sales of its less advanced AI chips to China. Given such a backdrop, the RMB could be a regional outperformer if the USD strengthens.
USD/KRW has rebounded to 1390 amid concerns over the US imposing a 25% tariff on Korea, even amid ongoing negotiations for a US trade deal. Renewed KRW weakness is striking with the KOSPI surging to its 2021 high amid a semiconductor boom and corporate governance reforms, with both foreign equity and bond inflows staying healthy this month. Spillovers from a weaker JPY may have contributed partially to KRW weakness. Meanwhile, Korean media reported that the US had asked Korea to create a multi-billion fund to invest in American manufacturing, though Korean officials did not comment on the government’s position.
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