August 13, 2018

Daily Observations:

Stocks slipped in Asia with the euro and emerging-market currencies, with safe haven assets such as Treasuries and the yen advancing, on continued turmoil in Turkey that’s sparked wider concern of potential market contagion. Worries intensified over Turkish President Tayyip Erdogan’s increasing control over the economy and deteriorating relations with the United States.

Turkey Crisis:

Turkey is set for another week of financial-market turmoil as its face-off with the US shows no sign of abating. With concern over the policy making vacuum, the lira did pare losses late Sunday as the nation’s Banking Regulation and Supervision Agency stepped in to limit swap transactions on the battered currency.

The Turkish currency has been a casualty of a deepening crisis spurred by the administration’s growth-at-all-costs agenda and a worsening spat with the US, which sanctioned Turkey over the detention of an American priest. The lira’s plunge to a record low and fears of a contagion sparked tremors through global markets, dragging a gauge for emerging-market currencies down on Friday to the lowest in more than a year.

The lira is down 25% in the past month with Recep Tayyip Erdogan maintaining his defiance toward the US and financial-market orthodoxy in speeches on Sunday. Pressured by US sanctions and a new constitutional order that concentrates power in Erdogan’s hands, Turkey’s central bank and finance ministry have done little more than monitor the worst market beating since the rout that took out much of the country’s financial sector in 2001. That led to an International Monetary Fund bailout and paved the way for Erdogan’s rise to power.

China Banks Unwillingly to Loan Cash:

The cost for banks to borrow from one another is now lower than the cost to borrow from the PBOC ever since the nation’s central bank turned on the liquidity taps last week, bringing the cost to borrow yuan overnight in the onshore market to the lowest since 2015. However a large chunk of banks’ funds remain idle; the money isn’t feeding into the wider economy, according to Bloomberg news, especially not to cash-strapped smaller firms, as lenders are unwilling to make loans or buy risky bonds.

With China in a worsening trade war with the US and also trying to control already large debts, ensuring funds get to needy companies is vital to sustain growth. Since the start of August, the central bank has begun softening rules to encourage lending, and a top-level meeting chaired by Vice Premier Liu He called for more efforts in “unclogging” the transmission mechanism, underlining the government’s sense of urgency.

Experts Split on Dollar Direction:

While investment titans such as Morgan Stanley and State Street Corp. wager the greenback’s rally this year is just about finished, Man Group Plc reckons it may have further to go; the escalating trade war between the US and China may only fuel the dollar’s strength, not stymie it, according to the latter.

According to a fund manager from Man Group, USD will  strengthen especially if the euro, which makes up about two-thirds of the dollar index, weakens because of any potential slowdown in Chinese demand for European products amid the trade war. This view clashes with a growing chorus of financial giants including Wells Fargo & Co. and JPMorgan Private Bank that argue the greenback is nearing its peak as the factors that fuelled its stellar run are being exhausted. They posit that US growth is waning just when other central banks are shuffling closer to winding back ultra-loose monetary policy. Morgan Stanley’s global head of FX strategy Hans Redeker reckons the dollar is “due to re-enter its secular downtrend soon” after gaining more than 5% since mid-April.

Risk of No-Brexit Deal Rises:

British Foreign Secretary Jeremy Hunt said the UK will not “blink” in Brexit negotiations, as he warned the EU it risks forcing the country to crash out of the bloc with no deal.

On his first trip to Berlin since he replaced Boris Johnson earlier this month, Hunt appealed for more flexibility from his European counterparts as time for talks runs out. He said failure to strike a deal would poison British attitudes to Europe for a generation and cause major economic challenges for the UK.

Hunt’s visit marks the start of a week of intense diplomatic efforts by the UK government in an attempt to step up the pace of negotiations. Talks in Brussels have stalled as EU negotiators awaited a clear plan from the UK for its future relationship with the EU. Prime Minister Theresa May published her compromise proposals on July 12 but has been struggling to win support for them among members of her own government.

Singapore 2Q Growth Disappoints:

Singapore’s economy grew at a slower pace in the second quarter than initially projected as construction plunged. 2Q GDP rose at a seasonally adjusted annualized rate of 0.6% quarter-on-quarter, less than the 1.4% predicted. On a year-on-year basis, GDP gained 3.9%, below the 4.1% estimate.

The export-reliant city state was already facing a high bar for growth this year following a boom in electronics demand in 2017 that fuelled global trade. After last year’s expansion of 3.6%, growth is set to moderate to a range of 2.5% to 3.5% in 2018, a forecast that the government retained on Monday.

External risks are now building as regional supply chains come under strain because of a U.S.-China trade war, oil prices remain elevated and the dollar strengthens. While the direct effect of higher US tariffs on Singapore’s exports was small, the trade conflicts could hurt global trade flows and growth if they escalate, the trade ministry said. Another external risk is rising US interest rates and the knock-on effect on emerging-market economies in the region if the Federal Reserve tightens policy faster than expected. The ministry said if this occurs, there could be a pullback in investment and consumption, which could hurt growth in the region.

FX Updates:

USD/SGD:

Spot: 1.3758

USDSGD rose to its highest in more than a year earlier today after a slump in the Turkish lira spurred risk aversion and weighed on most Asian currencies. A strong close above 1.3750 could lead to another leg up for USDSGD, with its next resistance residing around the 1.3900 handle.

AUD/USD

Spot: 0.7271

Amid broad risk aversion this Monday, AUDUSD declined to a 19-month low and confirmed the break below the key 0.7300 support. The next support of 0.7160 is next in line to be tested.

USD/CAD:

Spot: 1.3159

USDCAD maintained near Friday’s highs earlier today, amid broad USD strength and following a weaker Canadian dollar in the aftermath of last Friday’s jobs report which showed a decrease in full-time employment. The trend remains to the upside for the currency pair; support resides around the 1.3000 level while the key resistance lies at 1.3385.

USD/CNH:

Spot: 6.8900

The yuan extends its record ninth weekly loss amid broad US dollar strength. USDCNH neared the 6.9000 mark earlier today after the PBOC cut its daily fixing to the lowest level since May 2017.

USD/JPY:

Spot: 110.24

USDJPY slipped to its lowest in a month, as the yen rose against all its G-10 peers following an increase in demand for safe haven assets due to a slide in EM currencies. The uptrend in the second quarter of this year seems to have broken down; a break below the currency’s pair 200-day moving average of 110 would confirm the breakdown.

GBP/USD:

Spot: 1.2762

GBPUSD continued its slide following its break below 1.3000 last week. The currency pair reached a 1 year low on Friday amid growing concern over the prospect of a cliff-edge Brexit. International Trade Secretary Liam Fox stoked those fears when he put the risk of leaving the EU without an accord as high as 60%. Some dismissed his remarks as negotiating bluster, but even Bank of England Governor Mark Carney said the chances of a no-deal Brexit are “uncomfortably high.” And Prime Minister Theresa May said Wednesday she was stepping up preparations for such a departure.

Sources: Bloomberg