Issue#: 502/2018

Spot values at a glance:







Daily Observations:

Asian stocks fell with US equity futures as caution returned to global markets, with shares extending losses as data showed continued weakness in China’s economy. The yuan dropped with the Aussie, while the yen edged higher with Treasuries. Sentiment remains fragile as the week draws to a close, after ECB President Draghi said economic risks were moving to the downside, and as the odds of a no-deal Brexit and a US government shutdown increased.


Draghi Downbeat:

Mario Draghi said risks to the euro-area economy are worsening even as he called time on the European Central Bank’s flagship deflation-fighting tool. The ECB president told reporters in Frankfurt that while risks are still “broadly balanced,” they are now “moving to the downside” because of a range of concerns over geopolitics, trade protectionism and market volatility.

The significant change in language pushed the euro lower and was reflected in updated economic projections that lowered the immediate outlook for inflation and growth. Draghi’s caution underscores a gamble the ECB is taking by capping its massive monetary support after almost four years of purchases that added 2.6 trillion euros to the institution’s balance sheet.

The ECB yesterday took the watershed decision to halt its bond-buying program, capping massive monetary support even though the euro-zone economy looks vulnerable again. Signaling it’s still a way from tightening policy, the Governing Council changed its guidance to say maturing debt will be reinvested “for an extended period of time past the date when it starts raising the key ECB interest rates.” Rates will remain at record lows “at least through the summer” of 2019.


China’s Economy Slowed Again in November:

Chinese industrial production and retail sales growth slowed last month, though a pickup in investment may indicate that stimulus is beginning to reach the real economy. Industrial production growth decelerated to 5.4%, below all estimates. Retail sales growth slowed to 8.1%. Fixed-asset investment growth sped up, expanding 5.9% in the first 11 months of 2018.

Industrial production growth has slowed in 2018 along with a weakening of manufacturing. That’s despite the growth in exports which were boosted by front-loading of shipments to the US ahead of a possible increase in tariffs. November trade data showed that effect is starting to taper off, which may put even more downward pressure on manufacturing further ahead.

Growth of business investment has decelerated this year thanks to a government deleveraging campaign that led to a much slower increase in infrastructure spending. There are signs that investment is beginning to turn around.

Retail sales growth has been weak all year, with auto sales particularly bad. The government announced policy tweaks aimed at easing the tax burden on households, and is expected to continue leaning on fiscal stimulus to support the economy in the coming quarters.


US to Delay China Tariff Hike to March:

According to a Bloomberg news report, the Trump administration is making official its decision to delay until March 1 a tariff hike on $200 billion worth of Chinese goods to 25% from 10%, citing two people familiar with the matter.

A notice in the Federal Register is expected to be published on Friday, the people said. The decision cements an agreement reached Dec. 1 between President Donald Trump and his Chinese counterpart Xi Jinping during a dinner on the sidelines of the Group of 20 summit in Buenos Aires. The leaders agreed to postpone a further escalation in the tariff war for 90 days while they work out a trade deal. The tariff increase was initially planned for Jan. 1.

In the past two weeks, Beijing has pledged to remove retaliatory tariffs on US automobiles, buy a significant amount of US soybeans, go after intellectual property violators and scale back its strategy to dominate high-tech sectors in the next decade. Still, Trump administration officials caution that China’s promises to date are not enough to break the impasse. “They’ve started to make some very early stage, very preliminary, but very welcome moves,” Commerce Secretary Wilbur Ross told Bloomberg Television on Thursday, while adding that more action was needed to address US concerns.


US Government Shutdown Looms:

House Republican leaders sent their members home for a 6-day break Thursday without revealing any plan to avoid a looming government shutdown. Officials are wavering about whether to try to pass a spending bill with the $5 billion President Donald Trump is demanding for his wall at the Mexican border. Senate Republicans also haven’t announced any plan to fund the government.

Funding for some agencies, including the Department of Homeland Security, is set to run out after Dec. 21, and Trump says he’ll block any bill funding those agencies unless he gets the money for the wall.


Worldwide Debt Balloons:

Global debt hit a record $184 trillion last year, equivalent to more than $86,000 per person, more than double the average per-capita income.

Borrowing is led by the US, China, and Japan, the 3 biggest economies, the IMF said Thursday, highlighting potential risks to global expansion given that their share of debt exceeds that of output. Overall, the amount of worldwide public and private debt is equal to about 225% of GDP.

The IMF debt figure is $2 trillion higher than the fund’s previous estimate released in October, adding end-2017 data and several countries that had not previously reported updated numbers. The agency uses data for 190 countries dating back to the 1950s.

The US posted the widest November budget deficit on record as spending doubled revenue. Outlays jumped 18% to $411 billion last month, while receipts were little changed at $206 billion, the Treasury Department said in a monthly report on Thursday. That left a $205 billion shortfall, compared with a $139 billion gap a year earlier.

The US ran the largest deficit in six years in fiscal 2018, the first full year of Donald Trump’s presidency when his Republican party enacted a tax-cut package and raised federal spending for the military and other priorities. The measures have added to the growing federal deficit, which is forecast to push past $1 trillion by 2020 when the US next holds presidential elections.


EU Rejects May’s Call for More Assurances:

European leaders rebuffed Theresa May’s pleas to help her sell the Brexit agreement to a skeptical UK Parliament, toughening their stance as they stepped up planning for a chaotic no-deal divorce. May had come to Brussels hoping to secure some additional “assurances” on the most controversial part of her Brexit deal, the so-called Irish border backstop. While she made clear she wasn’t expecting a breakthrough straight away, she urged leaders to do everything they could to make the accord more acceptable at home.

But instead of giving her what she needs, leaders hardened their approach. They toughened the language of their communique, taking out some of the most helpful parts that diplomats had drafted in the run-up to the meeting. “Theresa May has led a courageous fight but unfortunately we are not seeing the results,” European Commission President Jean-Claude Juncker told reporters. He told May to come up with new ideas to fix the problem.

If May can’t persuade Parliament to back her plan, Britain will be on course to crash out of the club of 28 countries in just over 3 months’ time, unleashing political and economic chaos. Alternatively, she risks Parliament pushing her to rip up her Brexit plan, or even into a second referendum.

On Monday, May was forced to cancel a planned parliamentary vote to ratify her Brexit deal because she knew she’d lose. Two days later, she was fighting an attempt to oust her as prime minister from members of her own Conservative party dismayed at her handling of the UK’s exit from the EU. She survived the vote, but most of parliament still opposes her deal.


FX Updates:


Spot: 1.3722

USDSGD seems to have found decent footing around the 1.3700 handle, holding above it for the fifth consecutive session. The pair has recently recovered by as much as 1% since last week. USDSGD has largely maintained within the 1.3600-1.3875 range over the past 6 months. A breach below the 1.3600 support will likely result in an accelerated selloff towards the 200-day moving average of 1.3533.



Spot: 0.7191

AUDUSD declined below 0.7200 earlier today following poorer-than-expected Chinese economic data. From a technical perspective, the AUDUSD’s shorter-term trend remains to the upside, having broken out of its 2018 downtrend channel last month. The important support of 0.7161 needs to hold; a decline back below it would signal more downside to follow.



Spot: 1.3370

USDCAD is continues to hover just below its 1.3400 handle. The pair edged higher earlier today following overnight USD strength.  A convincing break above last week’s high of 1.3444 is likely to lead to a rise higher to 1.3600 over the near term.



Spot: 6.8886

USDCNH gained for the first time in 3 sessions, following weaker-than-expected China economic data released earlier today. The FX pair’s gain may be capped at its 50-day moving average at 6.9277. In recent weeks, there have been indications of a shift from, or at least a slowdown in, its upward momentum since June this year.



Spot: 113.49

The yen heads for a weekly decline after some recent signs of improvement in US.-China relations spurred risk taking and sapped demand for havens. USDJPY was little changed today, having gained 0.7% this week.

From a longer-term perspective, the pair’s 2018 uptrend seems to be tapering out; the pair has failed to hold above the 114 handle each time it was tested since October. A decline below 112.31, which could happen should investors flock to the yen as a safe haven asset, will confirm the breakdown of the trendline..



Spot: 1.2627

GBPUSD pared its previous day’s rebound, after May met with a wall of EU rejections in her attempt to get concessions on the current Brexit deal yesterday. The pair’s momentum remains firmly rooted to the downside, with a retest of the 1.2500 handle expected again soon. A break below it could lead a fall further to the next support target at 1.2351.


Sources: Bloomberg

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UEN: 201419754M

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