August 15, 2018

Daily Observations:

Asian stocks fell, Treasuries rose and the dollar climbed back to a 14-month high as risk appetite continued to be tested by the recent Turkey-induced turmoil. Shares declined in Japan, Singapore, Hong Kong and China, where technology stocks underperformed. 10-year Treasury yields dipped after climbing to 2.90%. Crude oil futures held above $66/bbl while spot gold declined below $1,190/Oz.

Turkey Crisis:

Turkey President Recep Tayyip Erdogan vowed to boycott iPhones in a demonstration of defiance as the US held firm to its demand that Turkey release an evangelical pastor and Turkish executives called for action to bolster the lira. Erdogan said the nation of 80 million people would stop buying American electronics, condemning the “explicit economic attack” against his country.

The lira lost a quarter of its value this month as Donald Trump doubled tariffs on Turkish steel and aluminum imports and slapped sanctions on 2 ministers. It rebounded on Tuesday as Turks sold dollars. There’s a “real possibility” Turkey will impose capital controls to stem the plunge in the lira, which would be bad for the whole developing-nation asset class, said veteran emerging-markets investor Mark Mobius.

While some investors are starting to weigh the possibility, the Turkish government has said repeatedly it won’t limit the flow of foreign money in and out of the economy. President Recep Tayyip Erdogan said over the weekend that the country wouldn’t raise interest rates or accept an international bailout.

Turkey Increases Tariffs on US Imports:

Turkey announced Wednesday it is increasing tariffs on imports of certain US products, escalating a feud with the United States that has helped trigger a currency crisis. In a decision announced in the Official Gazette, Ankara said it was imposing extra tariffs on imports of products including rice, vehicles, alcohol, coal and cosmetics.

Turkey’s Vice President Fuat Oktay said on Twitter that the tariffs on certain products were increased “within the framework of the principle of reciprocity in retaliation for the conscious economic attacks by the United States.”

China’s July Economic Data Disappoints:

China’s economy hit a mid-year rough patch as efforts to curb risky lending and excessive debt collided with a deepening trade war, adding to concerns about global growth.

Fixed asset investment year-to-date in July gained 5.5% from a year ago, less than the 6.0% predicted and at rose at its slowest pace in 20 years. Retail sales rose 8.8% from a year ago, slowing from 9.0% in June and missing the 9.1% estimate. Industrial production underwhelmed too, gaining 6.0% over the same period compared to analysts’ estimates of 6.3%.

China’s economy is now losing momentum just as it braces for a protracted trade conflict with the U.S., and those pressures show no sign of dissipating. Officials have vowed to boost lending to smaller companies and support for infrastructure investment, but the pressure is mounting on them to do more.

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 8% since mid-April.

Wage Growth Remains Subdued in Australia:

The wage price index in Australia rose 2.1% n the three months through June from a year earlier, matching economists’ estimates, the Australian Bureau of Statistics said in a report released Wednesday. The prolonged period of slim pay packets is helping contain inflation Down Under and has kept interest rates on hold for the past 2 years.

Governor Philip Lowe says annual wage growth needs to be at least 3% to help return inflation to the midpoint of the Reserve Bank’s target and allow policy makers to prepare for the first rate hike since 2010. Yet that scenario seems elusive even amid strong hiring and unemployment at 5.4%, about half a percentage point above the level that should trigger faster pay gains as labor becomes scarcer.

HKMA Intervenes to Defend HKD:

Hong Kong intervened to defend its peg to the dollar for the first time in three months after the local currency fell to the weak end of its trading band. The Hong Kong Monetary Authority bought HK$2.159 billion of local dollars during New York trading hours on Tuesday, according to the de facto central bank’s page on Bloomberg. The last intervention was on May 18.

The widening interest rate gap between Hong Kong and the US has driven carry trades that has led to outflows and weakened the local currency. The intervention also came as Hong Kong unexpectedly posted a quarter-on-quarter economic contraction for the 3 months ended June.

Indonesian Rate Decision to be a Close Call:

The wave of volatility engulfing emerging markets increases the odds of another interest-rate hike in Indonesia in a policy decision on Wednesday that economists say is a close call. A rate pause this week was looking like a comfortable prediction after 3 rate hikes totalling 100bps since mid-May helped to stabilize the rupiah and reverse some of the outflows earlier this year. That was all upended when Turkey’s lira plunged last week, sparking fears of emerging-market contagion that put the rupiah back in the spotlight and forced Bank Indonesia to step up its currency intervention to stem the fallout.

Indonesia plans to restrict imports of capital and consumer goods and accelerate the use of biofuel to cut crude oil purchases to help stem a slide in the rupiah, Finance Minister Sri Mulyani Indrawati said Tuesday.

FX Updates:

USD/SGD:

Spot: 1.3803

USDSGD gained to a fresh 1-year high, breaking above the 1.3800 handle in the process as the potential for further declines in EM currencies weighed on risk sentiment. The pair is likely to reach its next resistance of 1.3900 over the near term.

AUD/USD

Spot: 0.7208

AUDUSD’s decline persisted today with the pair sinking to the 0.7200 handle as falling commodity prices continue to weigh on the Australian dollar. Following the breach of the 0.7300 support last week, the next target level is at 0.7160, last reached during the second half of 2016.

USD/CAD:

Spot: 1.3074

USDCAD slipped lower overnight to trade lower for a second consecutive session , but remains well above the psychological 1.3000 level. The short trend is to the downside but the longer-term direction continues to point higher. Continued USD strength and weaker oil prices is most likely to lead the FX pair higher to its next key resistance of 1.3385.

USD/CNH:

Spot: 6.9203

USDCNH broke back above 6.9000 to reach its highest in over a year; the pair gained by as much as 0.6% to 6.9246 earlier today amid continued USD strength. Trade tensions between the US and China is likely to propel the FX pair higher, with the next batch of tariffs poised to start next week.

USD/JPY:

Spot: 111.27

USDJPY approached a 1-week high following a strong showing from the USD overnight. Demand for the safe-haven yen persists as Turkish contagion fears remain.

The uptrend in the second quarter of this year will be confirmed broken should the pair fail to regain back above 112.

GBP/USD:

Spot: 1.2702

GBPUSD continued its slide following its break below 1.3000 last week. The currency pair reached a  fresh 1-year low earlier today, sliding to the 1.2700 handle, as fears of a hard Brexit intensified recently with the UK parliament’s Conservative Brexiteers threatening to outright reject any trade deal presented by the Chequers.

Sources: Bloomberg