December 11, 2017

Daily Observations:

Stocks in Asia were moderately higher in subdued trading as investors deferred placing bets following the recent run-up to record highs and ahead of a Federal Reserve meeting this week. The US dollar pared some of last week’s gains ahead of a widely-expected US rate hike this week.

US Payrolls Gain, Wages Remain Tepid:

Payrolls rose 228,000 in November, above the median economist estimate of 195,000, Labour Department figures showed Friday. Average hourly earnings increased 2.5% from a year earlier, less than the 2.7% projection, and October’s figures were revised lower. The jobless rate held at 4.1%, the lowest since late 2000.

While the job market remains a bulwark for the economy and investors see a Federal Reserve interest-rate hike next week as a near-certainty, the lack of a sustained acceleration in wages remains a puzzle that could factor into the pace of increases in 2018. Jerome Powell, President Donald Trump’s nominee to head the Fed, said last month at his confirmation hearing that he doesn’t see wages signalling any tightness in the labour market.

A separate report on Friday showed US consumer sentiment dipped for a second month while remaining around levels consistent with a steady economy and solid job market, with stocks near record highs. The University of Michigan’s preliminary December gauge fell to 96.8, compared with the median estimate of economists for 99, as optimism waned and inflation expectations rose.

More Tightening to Come?

According to a Bloomberg news report, with the world economy heading into its strongest period since 2011, Citigroup Inc. and JPMorgan Chase & Co. predict average interest rates across advanced economies will climb to at least 1% next year in what would be the largest increase since 2006. As for the quantitative easing that marks its 10th anniversary in the US next year, Bloomberg Economics predicts net asset purchases by the main central banks will fall to a monthly $18 billion at the end of 2018, from $126 billion in September, and turn negative during the first half of 2019.

A clearer picture should form this week when the Norges Bank, Fed, Bank of England, European Central Bank and Swiss National Bank announce their final policy decisions of 2017. They collectively set borrowing costs for more than a third of the world economy. At least 10 other central banks also deliver decisions this week.

The Fed will dominate the headlines on Wednesday amid predictions it will raise its benchmark by a quarter of a percentage point. Outgoing chair Janet Yellen is set to signal more increases to come in 2018.

Geopolitical Concerns Persist:

China expressed pessimism about bringing the North Korean standoff to a peaceful resolution, even as Kim Jong Un’s regime touted new United Nations support for “regular” talks. Chinese Foreign Minister Wang Yi said Saturday “the outlook is not optimistic” on the Korean Peninsula and urged all sides to end what he said was a “vicious cycle” of confrontation. Wang’s remarks, part of a broad foreign policy speech in Beijing, came hours after North Korea said a departing UN delegation had agreed to communications to help ease tensions.

Bitcoin Futures Commence:

Trading in bitcoin futures begins 8:00a.m. Tokyo time on Monday as Cboe Global Markets becomes the first major exchange to offer the contracts pegged to the cryptocurrency that has soared more than 1,500% this year. The virtual currency that has divided opinions among executives and central bankers worldwide about its legitimacy as an asset has been on a wild ride in the past two weeks and at one point flirted with the $20,000 level. Cameron Winklevoss, said to be one of the largest holders, predicted it will rise as much as 20-fold as investors come to view it as an upgrade to gold. Meanwhile, New Zealand central bank governor Grant Spencer warned the gains resemble a speculative bubble and it’s too unstable to be useful in the future. Similar contracts start trading in a week on CME Group, another Chicago-based exchange, in a test of whether institutional money will go after bitcoin, which so far has mainly lured individual investors.

Brexit Breakthrough:

The UK and the European Union struck a deal to unlock divorce negotiations, opening the way for talks on what businesses are keenest to nail down, the nature of the post-Brexit future. The deal, made before dawn last Friday after rushed talks through the night, clears the path for discussions to start next year on the new terms of trade between the UK and its biggest commercial partner. The EU was quick to put down a marker of where it thinks those talks are headed and it’s far short of what May has said she wants.

The agreements outlined on Friday, including a 45 billion-euro divorce bill and vague promises on the sensitive issue of the Irish border, will come back onto the table if trade talks turn sour. While the EU made some concessions, the UK did most of the running.

Chinese Inflation Moderates:

CPI in November rose 1.7% year-on-year, less than the 1.8% expected and slowing from the prior figure of 1.9%. PPI over the same period came in at 5.8%, in line with expectations, but markedly slower than October’s 6.9% gain.

The moderating consumer and factory inflation last month from a year earlier suggest policy makers are doing the right thing by addressing the ballooning pile of debt with tougher financial regulation rather than monetary tightening.

FX Updates:

USD/SGD:

Spot: 1.3518

USDSGD enjoyed its largest weekly gain last week since late-October, breaking above the 1.3500 handle amid USD strength.

Having broken above its downward trend channel since the beginning of the year, the currency pair’s technical bias continues to remain to the upside, with the key support residing at its year-to-date low of 1.3346. To the upside, the 1.3700 handle is likely to cap further gains for the rest of the year.

AUD/USD:

Spot: 0.7521

AUDUSD lingered near 5-month lows Monday following last week’s 1.4% drop. The Australian dollar continues to be pressured amid divergence of monetary policies between Australia and the US.

The 0.7500 will be a key psychological level. A break below could trigger a further selloff in the Australian dollar, driving the currency pair lower towards 0.7300.

USD/CAD:

Spot: 1.2849

USDCAD enjoyed its highest weekly close since July, following the Bank of Canada’s dovish statement indicating that it will remain cautious in raising interest rates in the near future. The currency pair is expected to retest the psychological 1.3000 handle soon.

USD/CNH:

Spot: 6.6196

USDCNH continues to trade sideways, remaining little changed over the past week. The pair has been mostly trading within the 6.5700 – 6.6700 range since end September, and is expected to continue that trend through year-end.

The key support lies at 6.5500; a decline below it may pave the way for more downside towards the 2017-low of 6.4436.

USD/JPY:

Spot: 113.59

USDJPY rose to a 1-month high Monday, extending upon 2 weeks of decline, as strong US jobs data last Friday fuelled expectations for the Fed to raise interest rates this week.

The currency pair is set to retest the 114.50 resistance for the fifth time since May. A break above it is likely to drive the pair towards the 118 handle.

GBP/USD:

Spot: 1.3400

With an initial Brexit deal out of the way, pound traders will be focusing on whether optimism over that lasts and shifts the BOE thinking this week, with the central bank expected to keep rates on hold this Thursday.

GBPUSD pared gains on Friday on profit-taking after the deal was announced and extended losses as an EU official said a trade pact was not realistic by March 2019, when Britain is due to leave the EU.

Nonetheless, the currency pair is expected be buoyed above 1.3300, its previous resistance the last 2 months, over the near term.