August 27, 2018

Daily Observations:

Asian stocks gained at the start of the week following a fresh all-time high in their U.S. counterparts Friday, as the Federal Reserve reaffirmed a slow and gradual pace of policy tightening. The dollar ticked lower while the yuan pared some of Friday’s gains spurred by the PBOC move to support the currency.

PBOC to Support Yuan:

China’s central bank signaled that it’s taking action to support the yuan as trade tensions with the US show no signs of ending soon. Starting this month, banks resumed using an adjustment, known as the counter-cyclical factor, in the daily pricing of the currency against the dollar to counter the bias toward a weaker yuan, the People’s Bank of China said late Friday.

China had suspended use of the factor in January, a move interpreted to mean that policy makers had grown more comfortable with the yuan’s trajectory after several months of gains against the dollar. The PBOC said Friday that the factor “plays a positive role in keeping the yuan rate at a reasonable equilibrium level.”

Pessimism about the yuan’s value against the greenback lingers, as a trade war between the world’s 2 biggest economies is primed to escalate after officials failed to make progress in 2 days of negotiations in Washington. A new round of tariffs could come as soon as early September, after the countries slapped import taxes on $50 billion of each other’s goods.

US-Mexico Poised to Reach Nafta Deal:

According to a Bloomberg report, the US and Mexico are poised to resolve their bilateral Nafta differences as soon as Monday, creating an opening for Canada to rejoin talks covering $1.2 trillion in annual trade. Significant breakthroughs between Mexico and the US came during the past several days on the contentious issues of automobiles and energy, according to three people familiar with the process who asked not to be named discussing private talks.

Along with Canada, they’ve been negotiating for a year to overhaul the 24-year-old accord at the insistence of Donald Trump. The US president says the deal has led to hundreds of thousands of lost American jobs, and he promised to either change it to be more favorable to the US, or withdraw.

Trump said Saturday on Twitter that the US could have a “big Trade Agreement” with its southern neighbor soon. The terms of any deal struck by US Trade Representative Robert Lighthizer would need the president’s final approval. Companies operating across North America have worried that some of Trump’s demands could hurt the region’s economy.

Fed on Track for September:

Fed Chairman Jerome Powell cemented expectations for another rate hike in September and kept the chances for another shift in December firmly above 60%, according to Fed fund futures on Bloomberg. Speaking at Jackson Hole on Friday, he said there was “good reason” to expect the US economy to sustain its recent strength and that the “gradual process of normalization remains appropriate.”

US stocks rose and the dollar slipped as investors digested Powell’s first speech as Fed chief at Jackson Hole. Yields on the 10yr Treasury note were initially lifted before settling back to levels prior to his remarks.

Powell’s speech discussed at length the challenges of monetary policy at a time when economic benchmarks, such as estimates of full employment or the neutral policy rate, are uncertain. The two risks faced by the FOMC are moving too fast and shortening the expansion, or moving too slowly and allowing for overheating and financial excesses, he said.

“I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks,” Powell said. While unemployment is below the committee’s longer-run estimate of a rate that corresponds with non-inflationary use of labor resources, “there does not seem to be an elevated risk of overheating.”

China Outlook Still Murky For Some:

Beijing Longrising Asset Management Co., an equity-focused fund manager that’s made a 618% return since it started in 2008 and oversees about 20 billion yuan, revealed that it’s currently holding 10 billion yuan of that in cash.

The fund’s top executives are worried about China’s economic outlook and the trade conflict with the US, and expect that the extremely bearish sentiment toward equities may take years to recover. Longrising illustrates the depth of pessimism among China’s domestic asset managers, saddled with trying to find winners in the world’s worst-performing major equity market. Turnover is dwindling, suggesting little appetite to buy even with shares at the lowest valuations since 2014.

Longrising’s Stock Selection Fund, the firm’s flagship strategy, has returned 618% since its July 2008 inception, according to data from Shenzhen PaiPaiWang Investment & Management Co., which tracks so-called private funds such as Longrising. These products are open only to institutions and wealthy individuals, those deemed sophisticated enough to invest in products governed by looser rules. The Shanghai Composite dropped 3% in the same span. Still, Longrising’s fund has succumbed to losses this year, down 14% through the end of July, about the same as the broad market’s drop.

FX Updates:

USD/SGD:

Spot: 1.3645

USDSGD slipped earlier today to its lowest level in 2 weeks, and is in danger of breaking below its uptrend line since April. The bias has currently shifted to the downside, following a failure to hold above the key resistance of 1.3746 last week. The support levels below come in at 1.3528 and 1.3313.

AUD/USD

Spot: 0.7329

AUDUSD’s 2018 downtrend continues to remain in play following last week’s failure to test the 0.7400 handle. The currency pair had rallied from a weekly low on Friday following the election of new Prime Minister Scott Morrison. Powell’s slightly dovish speech over the weekend has also provided some support for the currency pair.

USD/CAD:

Spot: 1.3015

Following its 100-pip rally on Thursday, USDCAD retraced almost all of its gains on Friday as it approached the critical 1.3000 mark. The pair slipped further today, by as much as 0.2% to 1.3007 earlier. A major triangle pattern has emerged over recent months; the future direction of the FX pair is likely to depend on which side it breaks out from. The key support level remains at 1.2965, the pair’s 8-week low.

USD/CNH:

Spot: 6.7955

USDCNH declined to its lowest level in 3 weeks, after the PBOC announced last Friday it was taking action to support the currency through its daily fixing. The move is expected to end the one-way depreciation of the yuan, and stabilize it in the near term. A decline back to the 6.7000 region for USDCNH, a Fibonacci retracement level, is possible.

USD/JPY:

Spot: 111.05

USDJPY pared its gains from last week, slipping back to the 111 handle earlier today on the back of USD weakness. 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: 1.2858

GBPUSD was little changed earlier today, with the UK markets shut for a national holiday. While the pound was buoyed by UK Brexit Secretary Dominic Raab’s optimistic tone at a press conference last week, it’s still on course for a fifth monthly loss versus the dollar and the stakes are rising as the deadline to get a deal draws closer. With just over a month until the initial deadline that Britain set to reach a deal with Europe, the negotiations are still stuck on the Irish border issue and what kind of future relationships to pursue.

Sources: Bloomberg