April 10, 2018

Daily Observations:

Risk appetite showed signs of returning to markets as China’s President Xi Jinping struck a conciliatory tone, lifting stocks in Asia and US equity index futures, while safe haven assets such as gold and US Treasuries retreated. Xi’s speech eased investors’ worries about escalating trade disputes between China and the US.

Xi Strikes Conciliatory Tone:

China President Xi Jinping gave a keynote speech earlier today during the opening ceremony of the Boao Forum for Asia taking place in Hainan Island. He struck a conciliatory tone in his speech, adding that Cold War and zero-sum mentalities were “out of place” and backed free trade and dialogue to resolve disputes. The speech was highly anticipated by investors for any response to the barrage of recent US tariff threats.

Xi vowed to open sectors from banking to auto manufacturing. He indicated China would increase imports, lower foreign-ownership limits on manufacturing and expand protection to intellectual property, citing China was entering “a new phase of opening up”.

Bad News for US Treasury Bulls

Not only did the initial overnight rally in equities sap some of demand away from haven assets such as Treasuries, but data from Japan’s Ministry of Finance showed that the nation’s investors sold a net 3.6 trillion yen ($33.6 billion) worth of US bonds in February, the second-most on record and the fifth straight month they reduced their holdings.

Global investors, economists and government officials closely watch what the Japanese do in this space because they are the largest foreign holder of US Treasuries after China, controlling $1.07 trillion of the debt. As such, the US relies on demand from foreign investors such as Japan to finance its budget deficit.

To add fuel to fire, the nonpartisan Congressional Budget Office said the US budget deficit will surpass $1 trillion by 2020, 2 years sooner than previously estimated, as tax cuts and spending increases signed by Trump do little to boost long-term economic growth.

So if the Japanese are pulling back, and the Chinese follow through on their threat to slow or even stop their purchases of US debt, who will step up to fill the void? Diminishing demand could force the US to pay ever higher rates to attract investors, reducing the value of bonds that are currently outstanding.

Global Debt Rises to Record High:

Global debt rose to a record $237 trillion in the fourth quarter of 2017, more than $70 trillion higher from a decade earlier, according to an analysis by the Institute of International Finance. Among mature markets, household debt as a percentage of GDP hit all-time highs in Belgium, Canada, France, Luxembourg, Norway, Sweden and Switzerland. That’s a worrying signal, with interest rates beginning to rise globally. Ireland and Italy are the only major countries where household debt as a percentage of GDP is below 50%.

Euro Boosted by ECB Confidence:

After falling on Friday to its lowest against the dollar since the start of March, the euro began the week with a bang as top European Central Bank officials expressed confidence in the euro-area economy following a series of disappointing data. The euro surged as much as 0.4% in one of its biggest gains of the past few weeks. “We expect the pace of economic expansion to remain strong in 2018,” President Mario Draghi said in the ECB’s annual report.

Russia Sanctions Roil Ruble:

The ruble slumped by as much as 4.2%, its biggest decline since 2015, while Russian equities endured their biggest fall in 4 years, after dozens of Russian tycoons and companies were slapped with the most punitive US sanctions yet.

Among those named by sanctions were Oleg Deripaska, who owns aluminum giant United Co. Rusal. Revealing the potential ripple effect of being cut off from its western clients, Rusal said on Monday it was highly likely to default on debt. Its shares tumbled 28% in Moscow.

Trade War Clouds Singapore Outlook:

Rising US-China trade tensions are raising alarm bells in export-reliant Singapore, with an index measuring economic uncertainty climbing to a 5-month high in March. The Economic Policy Uncertainty Index for Singapore increased to 155 last month from 126 in February, showing the tariff threats are starting to make their mark, although the increase was a far wat off the 141-point jump to 283 in November 2016 following Donald Trump’s surprise presidential election victory.

FX Updates:

USD/SGD:

Spot: 1.3106

USDSGD continues to remain biased to the downside as the pair traded lower to its 1.3100 handle earlier today. Having failed to regain above 1.3200 – its first resistance level, last Friday, the momentum remains to the downside.

From a longer-term perspective, the downward trend which began more than a year ago remains intact. The key resistances remain at 1.3200 and 1.3350, while to the downside, the psychological 1.3000 holds firm.

AUD/USD

Spot: 0.7736

AUDUSD remains below its 200-day moving average, although the pair rallied to a 2-week high earlier today following China President Xi’s market-friendly speech. The longer-term trend’s base around the 0.7600 handle remains a key support region; a decline below it is likely to lead to a reversal in the 2-year old uptrend.

To the upside, any further rallies look likely to remain capped below its 200-day moving average around the 0.7800 handle.

USD/CAD:

Spot: 1.2682

USDCAD retreated to its lowest in 6 weeks, sliding by almost 1% earlier today from its previous session’s close back down below 1.2700. The Canadian dollar strengthened after a Bank of Canada survey showed business sales outlook improved in the first quarter of this year despite lingering Nafta uncertainty, thus supporting expectations for further interest rate hikes.

The 200-day moving average of 1.2632 is likely to be the next level of support for the currency pair.

USD/CNH:

Spot: 6.2946

USDCNH declined back below its 6.3000 handle, with the CNH strengthening following Xi’s speech earlier today. The pair has pared declines from a 2-1/2 year low in end-March, and looks likely to continue its sideway trend over the near-to-medium term, ranging largely between 6.2500 and 6.3700.

USD/JPY:

Spot: 107.07

USDJPY regained all of its overnight losses following China President Xi’s support for global trade in his speech made earlier today. Safe haven assets such as the yen weakened after Xi eased concerns that the tariff spat with the US will escalate.

The currency pair has recovered well from a 16-month low; its next resistance level to test lies around the 108 handle.

GBP/USD:

Spot: 1.4133

GBPUSD has enjoyed a nice rebound from the 1.4000 round handle last week. The bias remains to the upside; the currency pair is likely to retest its March and January highs of 1.4245 and 1.4345 respectively. Given the prospect a Bank of England rate hike is likely next month, the currency pair is likely to remain supported above the 1.4000 handle.