Issue#: 540/2020

Spot values at a glance:

USD/SGD

USD/CNH

AUD/USD

USD/JPY

USD/CAD

GBP/USD

Daily Observations:

Chinese shares slid and the yuan weakened Monday as traders returned from an extended holiday amid the worsening coronavirus outbreak. Support measures from China’s government helped stem losses somewhat in Asia, while US futures rose and Treasuries slipped. Oil and gold saw modest declines.

 

China Stocks Sink as Coronavirus Infect Markets:

Chinese stocks plummeted by the most since an equity bubble burst in 2015 as they resumed trading to the worsening virus outbreak. The CSI 300 Index dropped by as much as 9.1%, while the Shanghai Composite plummeted 8.7%, as onshore financial markets opened for the first time since Jan. 23. China’s benchmark iron ore contract fell by its daily limit of 8%, while copper, crude and palm oil also sank by the maximum allowed. The yield on China’s most actively traded 10-year government bonds dropped the most since 2014. The yuan weakened 0.8% to the cusp of 7 per dollar.

The PBOC added 900 billion yuan of funds with 7-day reverse repurchase agreements at 2.4%, according to a statement. It will also inject 300 billion yuan with 14-day contracts at 2.55%. While the total is the largest single-day addition of its kind in data going back to 2004, it implies a net injection of just 150 billion yuan as more than 1 trillion yuan of short-term funds mature. Regulators have in the past days unleashed targeted measures to help blunt the pain for companies, banks and individuals, as well as pledging financial stability. The central bank has said it will ensure adequate interbank liquidity conditions, supplying cash that will more than offset the 1.05 trillion yuan in short-term funding that matures Monday.

Officials also urged investors to evaluate objectively the impact of the coronavirus, which has killed more than 360 and spread to more than 17,000 people as of 3 Feb 2020. The outbreak is leaving China increasingly isolated. The U.S., India, Australia, Indonesia, Singapore, Israel, Russia, New Zealand and the Philippines have all imposed restrictions on visitors from China. In Hong Kong, the government said it was studying further controls on travel from the mainland in response to a planned strike by medical workers aimed at pressuring the government to shut the border with China

 

Brexit Tussle Resumes:

The UK and the EU begin their battle over a future trade deal on Monday, setting up 11 months of negotiations that risk ending in economically damaging failure at the end of the year. In a major speech in London, Prime Minister Boris Johnson will threaten to walk away from talks with the EU rather than accept demands from Brussels to sign up to the bloc’s single market regulations and the rulings of its court.

He will tell EU ambassadors that he wants a comprehensive trade agreement at least as good as the one the bloc has reached with Canada, but will insist that “Britain will prosper” even without such a deal. Soon after Johnson finishes speaking, EU chief Brexit negotiator Michel Barnier is due to set out his planned negotiating position with a speech in Brussels.

After 3 years of bad-tempered talks on the UK’s political withdrawal, early signs indicate that the parties could struggle to avoid a cliff-edge change in their trading arrangement come 2021. European Commission President Ursula von der Leyen has said it’ll be “impossible” to sign off on a full deal before Johnson’s year-end deadline. Johnson’s team, meanwhile, has been firm in rejecting what it sees as unfair demands from the EU side. The key clash is over whether Britain must sign up to the bloc’s single market regulations in exchange for access to tariff-free trade.

British officials want the EU to treat the UK as an equal in the negotiations. Johnson will point out that the EU repeatedly offered Britain a choice between Norway-style membership of the bloc’s single market, which would require keeping Brussels’ regulations, or a Canada-style free-trade agreement, and that he is choosing the latter. But if no free-trade deal is possible by the end of the year, the UK will be ready to take a looser arrangement like Australia’s, Johnson will say. That would involve doing business on WTO terms in most areas, with tariffs on goods, while processes would be agreed to reduce some regulatory barriers.

 

Oil Demand Hit:

Chinese oil demand has dropped by about 3 million barrels a day, or 20% of total consumption, as the coronavirus squeezes the economy, according to people with inside knowledge of the country’s energy industry.

The drop is probably the largest demand shock the oil market has suffered since the global financial crisis of 2008 to 2009, and the most sudden since the Sept. 11 attacks. It could force the hand of the OPEC cartel, which is considering an emergency meeting to cut production and staunch the decline in prices, which are headed for the lowest close in 4 months.

China is the world’s largest oil importer, after surpassing the US in 2016, so any change in consumption has an outsize impact on the global energy market. The country consumes about 14 million barrels a day, equivalent to the combined needs of France, Germany, Italy, Spain, the UK, Japan and South Korea. Chinese and Western oil executives, speaking on condition of anonymity because they aren’t authorized to discuss the matter publicly, said the decline was measured against normal levels for this time of year. It’s a measure of the current loss in demand, rather than the average loss since the crisis started, which would be smaller.

The collapse in Chinese oil consumption is starting to reverberate across the global energy market, with sales of some crudes slowing to a crawl and benchmark prices in free-fall. Sales of Latin American oil cargoes to China came to a halt last week, while sales of West African crude, a traditional source for Chinese refineries, are also slower than usual, traders said.

Chinese refineries are storing unsold petroleum products such as gasoline and jet fuel, according to the executives. But every day stockpiles are growing, and some refineries may soon reach their storage limits. If that were to happen, they would have to cut the amount of crude they process. One executive said that refinery runs were likely to be cut soon by 15-20%.

Traditionally during the New Year holiday, gasoline and jet-fuel demand increase as hundreds of millions go back home, while gas oil consumption drops as industrial activity slows.

 

RBA on Hold:

Australia is set to keep interest rates unchanged Tuesday as policy makers keep searching for signs that prior stimulus is encouraging households to spend. Hovering over the meeting is the spectre of a viral-induced slowdown in China. RBA Governor Philip Lowe will keep the cash rate at 0.75% at the central bank’s first meeting of the year, according to 22 of 25 economists, with markets pricing similarly. The turnaround, the majority began the year forecasting a February easing, was driven by a fall in unemployment in the final two months of 2019.

“The economic data has generally come in on the stronger side over recent months,” said Kristina Clifton, a senior economist at Commonwealth Bank of Australia. “But the virus has the potential to impact on economic growth as consumers spend less, business and consumer confidence drops and tourists and people traveling for business delay their plans.”

According to Bloomberg news, most economists trying to discern the impact of novel coronavirus have harked back to the SARS epidemic 17 years ago. Yet, that was a different world. Australia’s links to China’s economy have increased exponentially since. The numbers tell the story:

  • China’s share of Australian exports was 33% in 2018-19 vs 7% in 2002-03
  • Tourists from China jumped to 15% of total arrivals from 4% over the same period; and now account for more than a quarter of total visitor spending
  • Almost a quarter of new foreign students are from China
  • China bought 82% of Australian iron ore shipments last year, compared with 32% in 2003

A complete shutdown of Chinese tourism and student travel for a year would cut Australian GDP by almost 1 percentage point, “with significant additional multiplier effects,” according to Westpac Banking Corp. The Australian tourism industry is already dealing with a demand shock following the wild fires that drove cancellations from abroad amid images of major cities choking on smoke, Australians fleeing their homes and fallen native animals.

Lowe cut interest rates 3 times between June and October to shore up consumer spending amid weak wages growth and elevated debt. The economic data in the past month has exceeded expectations. Traditionally, the bank looks through one-off shocks, like bushfires and cyclones, taking the view that the subsequent reconstruction drives a comparative rebound.

 

Biden Widens Lead:

Joe Biden is opening a daunting lead over the rest of the field in the March 3 Texas primary, but his advantage has slipped in South Carolina, where the primary later this month is crucial for his campaign, according to two polls released Sunday. The former vice president leads Senator Bernie Sanders, his closest competitor, in Texas by 17 points in a poll by the Dallas Morning News and the University of Texas at Tyler.

The good news for Biden in one of the biggest “Super Tuesday” states was tempered by results of a Charleston Post and Courier poll in South Carolina. His lead there ahead of the Feb. 29 primary has slipped to a mere 5 points over Sanders, after having been as large as 31 points last May in the newspaper’s poll. South Carolina is supposed to be Biden’s firewall, giving him a reliable tranche of delegates after harder-fought contests in Iowa, New Hampshire and Nevada.

Taken together, the two poll results suggest that Biden could face a more complicated path to the nomination. Results of later primaries are likely to be influenced by the results of earlier ones, so South Carolina is seen as a key momentum-builder going into delegate-rich states like Texas and California.

The Texas poll released Sunday shows Biden at 35%, followed by Senator Bernie Sanders at 18%. Senator Elizabeth Warren and former New York Mayor Michael Bloomberg have 16% each.

 

Sources: Bloomberg

 

FX Updates:

USD/SGD:

Spot: 1.3679

USDSGD approached a 2-month high and breached its 200-day moving average of 1.3666 earlier today, as the spread of the coronavirus saps demand for the trade-sensitive Singapore dollar. The currency pair has risen 1.6% since mid-January, and looks set to test the key resistance at the 1,.3700 handle soon. According to an OCBC note to investors, Singapore’s GDP growth could potentially be shaved off by up to 0.5-1% point from the baseline if the current epidemic lasts more than 3-6 months.

 

AUD/USD

Spot: 0.6689

AUDUSD maintained below 0.6700 early Monday, hovering just above its key support of 0.6670. The currency pair failed to rebound above 0.6700 earlier despite a better-than-expected reading of Chinese PMI numbers. January’s Caixin PMI came in at 51.1, just a hair above the 51.0 print expected but below December’s 51.5. This was the lowest reading since August 2019. A break below the key 0.6670 level is likely to trigger a rapid move to the 0.6500 handle.

 

USD/CAD:

Spot: 1.3245

USDCAD rose to a 7-week high earlier today, and maintained above its 200-day moving average for a second straight day, as the Canadian dollar continues to get weighed by falling oil prices. In addition, the Bank of Canada has also recently expressed a dovish sentiment, admitting last month after its last policy meeting that it is expecting growth to be weaker than its last projection in October. Its statement also dropped an assertion that the current rate was appropriate that it had used since last April.

 

USD/CNH:

Spot: 7.0177

USDCNH gained to its highest in more than a month – up 0.3% to 7.0177 earlier today, as mainland markets reopened after staying shut for more than a week. The yuan weakened despite the PBOC setting its daily fixing at a stronger-than-expected level and as equities plunged.

 

USD/JPY:

Spot: 108.54

USDJPY pared some of Friday’s losses, although short-term bias remains to the downside, with the pair breaking its 50- and 100-day moving averages in the past week and testing the 200-day one this morning. The key support is at 107.65, last traded on Jan 8. Increased haven demand could drive USDJPY lower over the near term.

 

GBP/USD:

Spot: 1.3157

GBPUSD closed last week above 1.3200, although the pair retreated Monday back below following reports that Boris Johnson might possibly walk away from talks over the UK’s future trade partnership with the EU if he doesn’t get what he wants. The pair is likely to remain capped at 1.3400 as talks continue to muddle along. A break below 1.3000 is likely to trigger a retreat back to 1.2800.

 

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