Spot values at a glance:
The dollar rallied for the first day in six as investors awaited a meeting of global central bankers after the Federal Reserve signalled no change to its pace of monetary policy tightening. Asian stocks traded mixed. The Australian dollar fell as Prime Minister Malcolm Turnbull lost key support in a blow to his leadership.
FOMC Signals Readiness to Hike:
US central bankers are ready to raise interest rates again so long as the economy stays healthy, according to a record of the Fed’s most recent policy meeting. “Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation,” minutes of the July 31-Aug. 1 Federal Open Market Committee meeting released Wednesday in Washington said.
The minutes said that “further gradual increases” in their target rate “would be consistent with a sustained expansion of economic activity, strong labor market conditions and inflation near the committee’s symmetric 2% objective over the medium term.” Many officials, the minutes said, “noted that it would likely be appropriate in the not-too-distant future to revise the committee’s characterization of the stance of monetary policy” in its statement, the minutes said. Describing policy as “accommodative” would at some point “fairly soon,” no longer be appropriate, the minutes said.
There’s little evidence that the 7 quarter-point increases since December 2015 are hurting growth. Nevertheless, the rate increases have drawn criticism from President Donald Trump. Powell may update his outlook when he gives a speech Friday on “Monetary Policy in a Changing Economy” at the Kansas City Fed’s annual forum in Jackson Hole, Wyoming. Fed officials left the benchmark lending rate unchanged earlier this month while upgrading their description of economic growth in their statement to “strong,” compared to “solid” in June.
Australian PM Turnbull’s Days Seem Numbered:
Prime Minister Malcolm Turnbull suffered what looked to be a fatal blow to his leadership on Thursday as 3 key Cabinet ministers resigned and pledged support for right-wing populist Peter Dutton. Dutton, who narrowly failed to unseat the prime minister earlier in the week, said on Thursday he had the party’s support and demanded that Turnbull call another leadership vote.
According to Bloomberg news, Treasurer Scott Morrison, a Turnbull ally, is preparing to run against Dutton if a ballot is held on Thursday, Sky News reported, without saying where it got the information. Finance Minister Mathias Cormann, Communications Minister Mitch Fifield and Jobs Minister Michaelia Cash held a news conference on Thursday morning to announce their resignations and demand Turnbull convene an immediate meeting.
Australia’s latest political upheaval has been driven by infighting between moderates and conservatives in the ruling Liberal party as its poll numbers fall ahead of an election due by May. The main opposition Labor party led by 10 percentage points in a poll released on Monday.
The potential change of leadership adds more uncertainty for businesses amid repeated policy missteps and flip-flops over the past decade. Since 2007, the world’s 13th-largest economy has seen 5 leadership changes and no prime minister has lasted a full term, contributing to policy paralysis across areas such as taxation and energy.
Cohen-Trump Fallout Continues:
Trump’s former personal lawyer, Michael Cohen, has “knowledge” about computer hacking and collusion that may interest Special Counsel Robert Mueller in his investigation into Russian interference in the 2016 election, Cohen’s lawyer said.
One day after Cohen pleaded guilty to illegal campaign finance charges over hush money paid to a porn actress and a former Playboy model, all but naming Trump as having ordered him to do it, Cohen’s lawyer said Wednesday he would be happy to share the information with the special counsel or Congress. Trump denied using campaign funds as hush money Wednesday, telling Fox News that he only learned of the payments “later on.”
US & China Resume Trade Talks:
The revival of trade negotiations between the US and China after a months-long standstill has provoked new hopes in financial markets that an all-out trade war may be averted. Yet this week’s gathering in Washington may also highlight the continuing divide inside the Trump administration over how best to deal with Beijing and how China hawks are winning that battle.
US Treasury Undersecretary for International Affairs David Malpass and Chinese Vice Commerce Minister Wang Shouwen are meeting for the first face-to-face trade discussions since June. Hanging over the meetings will be the next round of tariffs on $16 billion of each nation’s exports to the other, which are set to take effect Thursday. The talks between the mid-level officials aren’t expected to draw in senior decision-makers and are predicted only to result in a joint statement of productive discussions.
China’s Infrastructure Spending Push:
China’s return to large infrastructure spending is triggering a flood of new local government bonds, something analysts say will force the central bank’s hand to inject more liquidity to meet the higher debt supply.
The government in China is encouraging local authorities to ramp up funding to boost building projects, a change from the push in the recent years to rein in debt-fueled growth. The increase is already showing up in the data and analysts reckon the supply of local debt in August and September will mark a fresh high for issuance.
While policy makers have tried to ease credit markets since July to revive a slowing economy in the midst of the trade war with the US, concerns remain that any surge in the supply of local government bonds may siphon funds away from the inter-bank market and trigger liquidity injections from the nation’s monetary policy makers.
Singapore PM Lee Sees ‘Large Expenditures’ on Health, Housing:
Singapore’s Prime Minister Lee Hsien Loong outlined plans to boost support on health care and public housing that he said will require “large expenditures,” putting pressure on the city state to find new sources of funding for its growing social spending.
Lee’s initiatives, detailed in his annual National Day Rally speech over the weekend, are aimed at providing financial reassurance to Singaporeans for years to come and to address locals’ concerns about rising living costs. The plans come at a time when governments around the world grapple with the challenge of losing voter support over rising income inequality.
While the economy is doing well, unemployment is relatively low and wages have increased, many Singaporeans still feel their incomes aren’t sufficient to cope with higher costs, Lee said. He cited several reasons for this, including young families spending on housing and pre-school education, medical costs for the elderly, lifestyle costs, such as travel and food, and inflation. Lee said Singapore will require a “thriving economy and sound government finances” to fund the initiatives, which range from extending health care insurance to revamping public housing.
USDSGD erased declines from its past 2 days, gaining back above the 1.3700 handle earlier today, amid a rebound in the greenback overnight ahead of Fed Chairman Powell’s speech at Jackson Hole this weekend. Singapore inflation data for last month, due out later today, is expected to show price pressures remain subdued.
With inflation remaining stable and growth expected to slow down in the second half of this year, the MAS is expected to keep monetary policy on hold in October. A retest of the 1.3800 handle is expected over the near term.
AUDUSD slumped back below 0.7300 and looks set to retest the strong support at 0.7200 again. The Australian dollar has been weighed down by political uncertainty as current PM Turnbull’s tenure becomes increasingly insecure.
USDCAD reversed its overnight decline earlier today, as a broad rally in the USD boosted the currency pair back above 1.3000. The Canadian dollar, prior to today, was near 2-week high levels due to softness in the greenback, combined with rising optimism on a quick resolution to the NAFTA renegotiation. The key support level remains at 1.2965, the pair’s 8-week low.
USDCNH seems poised to make a renewed push for the 6.9000 handle, as China and the US near the next round of tariffs on each other’s exports and as the Fed signalled its readiness to hike rates again. Continued USD strength is expected to push the currency pair higher over the coming week.
USDJPY extended this week’s rebound off its 200-day moving average, close to its 110 handle. The pair breached overnight highs earlier today, amid a broad-based USD rally.
The uptrend in the second quarter of this year will be confirmed broken should the pair fail to regain back above 112.
GBPUSD declined for the first time since last Friday, reversing an overnight advance. The pound has strengthened this week, underpinned by Brexit-related news, as EU Chief Negotiator Barnier and UK Brexit Secretary Raab agreed to hold non-stop Brexit negotiations and pledged to reach a deal.