May 2023 Wrap Up
What were the key moments in the market this month?
Another month, another hike by the Fed
During the Federal Open Market Committee’s meeting on May 3rd, the members unanimously decided to increase interest rates by 0.25 percentage points. This marks the 10th interest rate hike in a little over a year and signifies the highest since August 2007, where this round of increase sets the fed funds rate to a target range of 5%-5.25%.
As usual, markets are buzzing over whether a potential pause for the Fed may be in sight, as worries over economic growth and banking crisis continue to loom ahead. During the news conference, Chairman Jerome Powell said “a decision on a pause was not made today” but acknowledged the significance of the change in the statement language used to describe future policy firming. All the modifications to the previously released statement seem to indicate that although a tight policy may persist, the future trajectory of actual interest rate increases remains uncertain as policymakers evaluate incoming financial data.
China puts her foot down
A declaration has come from the central bank of China regarding its firm commitment to control significant fluctuations in the exchange rate and explore measures to strengthen the self-regulation of dollar deposits. The announcement was made as a result of the yuan’s recent decline to multi-month lows and surpassed the crucial threshold of 7-per-dollar. The current situation can be attributed to factors such as a sluggish economic recovery, low yields, and the strong rally of the US dollar.
To maintain exchange rate stability and mitigate the impact of external factors, the People’s Bank of China outlined its plans to jointly guide expectations with the forex regulator, rectify any pro-cyclical and one-sided behavior and clamp down on speculation.
What Netflix & Amazon addiction is doing to yen
Barclays analysts have reported that due to the increasing flow of Japanese money abroad to pay for digital services such as movies and music streaming services, the situation has become a burdensome factor for the yen. “This digital deficit appears to reflect a structural change in the behavior of consumers and businesses, suggesting it will persist,” the Barclays team wrote. “That implies an increase in yen-selling pressure.” The outflow of funds to overseas technology companies like Netflix and Amazon amassed 4.8 trillion yen last year, which is equivalent to 90% of Japan’s services account deficit.
As a result, the yen might repeat its position of being the second-weakest currency among the Group-of-10 again this year, depreciating over 5% against the US dollar. Speculation regarding the Bank of Japan making early adjustments to its monetary policy has dwindled, contributing to the yen’s decline.
India says bye to 2,000-Rupee notes
On May 19, the Reserve Bank of India (RBI) announced its decision to withdraw the highest denomination currency notes of 2,000 rupees from circulation. As a result, the rupee is predicted to start off weaker against the US dollar. According to non-deliverable forwards, the rupee is expected to begin trading against the dollar at approximately 82.80-82.84, contrasting the previous session’s rate of 82.66. Analysts widely anticipate the rupee to be impacted by this move, and therefore, the important resistance level of 82.90 will be closely monitored to see if the RBI imposes any restrictions.
The RBI also stated that citizens have until the end of September to exchange or deposit the 2,000 rupee denomination notes. “We do not expect a rush at banks to exchange the notes. People don’t have to go immediately as enough time has been given,” said Governor Shaktikanta Das during a press briefing in New Delhi.
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