Dollar strength has peaked, but this is not the end of it

Dollar strength has peaked, but this is not the end of it
Tracing the trajectory of the Dollar requires an understanding of where the US economy is in the current cycle, the inflation trajectory and the Fed’s plans for tightening.

• A US recession is not our baseline scenario , going by the bevy of bottom-up indicators which paint a rosy picture of consumer spending, factory orders and labour market conditions.
• Peak inflation is finally in sight, but watch for services inflation. There has been a handoff in goods inflation toward that of services, particularly shelter, which is more inertial and sticky. New leases are already up 25% since Feb 20, while average rents are up just 10%, suggesting a reckoning on the cards for shelter inflation with a lag.
• The Fed is staring down markets as senior Fed officials have reiterated that rate cuts next year are not on the table, despite market expectations to the contrary. In any case, the Fed is not done tightening just yet as we expect another 75bps hike in September, with rates ending the year at around 3.75%-4%, followed by an extended pause thereafter.
• In sum, the Dollar has peaked, but the descent will be anything but orderly.

Indonesia Budget 2023 offers a credible path to consolidation

• There were no surprises in President Jokowi’s budget speech , as the administration sought to spell out a credible fiscal consolidation pathway as the 3% fiscal cap kicks in from 2023.
• The fiscal stance is deeply negative, amid the belt-tightening efforts alongside the robust tax mop-up. Macroeconomic assumptions and revenue projections appear credible.
• The modest improvement in revenue metrics belies the buoyant mop-up in tax revenues , as we reckon the revenue projections are a tad too conservative. More likely than not, the fiscal deficit should end up around 3.5% of GDP this year, if the recovery remains on track.
• President Jokowi paid lip service to several reforms, such as human capital deepening and infrastructure development in his budget speech without any follow-up action.
• To us, this hints at the possibility that the authorities intend to consolidate the gains from recent reforms now that the administration is more than halfway through its second term.

What has changed recently:

• A slow drip-drip of developments is increasing tensions among the big powers in Asia. Relations between China on one side and the US, Europe, Japan, India and South Korea are worsening. That keeps the tinder dry on the ground and raises risk of escalating frictions.
• In India, the BJP’s dominance is being challenged: Its ally, the JD(U) party in Bihar, the third most populous state, has defected, heralding a broader political re-alignment that could complicate the BJP’s efforts to secure a third term in office.
• China is at a policy turning point, with signs that the authorities are likely to shift away from incremental measures to more aggressive ones to steady the fragile economy.
• Thailand could deliver an upside surprise as tourist arrivals grew faster than expected.
• Singapore’s Prime Minister gave his annual state of the nation address: The key takeaway was that the government is doubling down on its global city strategy.

Read more: CAA-Weekly-22-Aug-22.pdf