January 11, 2018

Daily Observations:

Asian stocks slipped into the red Thursday, as investors dialled back their appetite for risk assets amid a jump in government bond yields following news that Chinese officials have recommended slowing or halting purchases of US bonds. In North America, Canadian officials raised the odds of the Trump administration withdrawing from Nafta.

China Ponders Slowing or Halting Treasury Purchases:

Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of US Treasuries, according to people familiar with the matter.

China holds the world’s largest foreign-exchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them. It isn’t clear whether the officials’ recommendations have been adopted. The news comes as global debt markets were already selling off amid signs that central banks are starting to step back after years of bond-buying stimulus. 10yr Treasuries sold off on the news before paring losses later in the day. Some analysts took the developments to be mostly political posturing from Beijing amid escalating trade tensions with the US.

Odds of US Leaving Nafta Raised:

Canadian government officials said there’s an increasing likelihood US President Donald Trump will give 6-months’ notice to withdraw from Nafta, dragging down the loonie, yields on government bonds and Mexico’s peso. The officials, speaking Wednesday on condition they not be identified, declined to say whether they think the odds of Trump following through on repeated threats to quit the pact now exceed 50%.

The comments have raised worries the Nafta countries, the U.S., Canada and Mexico, who trade more than $1 trillion annually, are further apart on coming to an agreement than feared. The Canadian officials said a US withdrawal notice could come at any time, and Prime Minister Justin Trudeau’s government is considering all options related to industries that would be most affected.

Trade relations between the US and Canada countries have taken a dramatic turn this week, with Canada escalating its spat with the US by filing a World Trade Organization complaint over American duties against Canada and other countries. US Trade Representative Robert Lighthizer called that a “broad and ill-advised attack.”

China Implement New Rules for the New Year:

China started the new year with a flurry of rules that may tighten financing for less-creditworthy borrowers, as policy makers prioritize efforts to limit broader risks to the financial system. Over the first few days of 2018, the nation’s top regulators announced rules governing banks’ involvement in entrusted lending, barred insurance firms from extending loans in the guise of equity investment and tightened supervision on leveraged bond trading.

According to Bloomberg news, China is growing more confident in economic growth, giving leaders increased opportunities to clean up the most risky corners of the financial system. Closing regulatory loopholes and thereby slowing the pace of credit growth may enable policy makers to reduce systemic dangers, as the new rules make it more difficult for riskier firms to borrow, curb local infrastructure investment and limit a key funding source for some banks.

Australian Retail Sales Jump:

Australian retail sales last November rose 1.2% month-on-month, improving upon the prior gain of 0.5% and exceeding the median estimate of 0.4%.

Strong showing in the retail sector has increased speculation of an RBA-led rate hike in the second half of 2018, as swap traders boosted offs of a rate hike to 65% by August, from 52% yesterday.

Weekly Thematic News:

Smart Real Estate Singapore:

Credit Suisse Group AG and Morgan Stanley are calling the end of Singapore’s property downturn, after a second consecutive quarterly increase in private residential prices. Home prices may rise as much as 10% this year, according to analysts at Credit Suisse, while Morgan Stanley and OCBC Investment Research expect as much as an 8% increase, according to reports from the brokerage firms.

Private residential prices rose for a second straight quarter in the period ended Dec. 31, reinforcing signs that the city-state’s property market is emerging from a 4-year slump. For 2017, prices rose 1% compared with a 3.1% decline in 2016, data from the Urban Redevelopment Authority showed.

Investors looking to invest in the local real estate sector can buy into the Smart Real Estate Singapore portfolio on iAdvisor, which has returned a healthy 31.4% from a year ago and provides a dividend yield of 4.8% as of Monday.

FX Updates:

USD/SGD:

Spot: 1.3320

USDSGD pared a recent rebound, dropping back towards the 1.3300 handle last night. The momentum for the currency pair continues to remain to the downside, have broken below its key support of 1.3300 last week.

The Singapore Dollar has been trading nearer towards the stronger end of its trade weighted basket for several months, hence a modest tightening at the April MAS meeting is possible. South Korea has already raised rates and Malaysia is poised to do so later this month, so a hawkish Singapore adjustment could be appropriate in this Asian context.

AUD/USD:

Spot: 0.7869

AUDUSD gained to a fresh high Thursday, after better-than-expected retail sales numbers earlier boosted odds of an August rate-hike.

According to Bloomberg news, a month-long rally in the Australian dollar is due for a pause if hedge funds and other large speculators are to be believed; they’re holding the biggest short position in the Aussie in almost 2 years. The next area of resistance looms around the 0.7900 handle.

USD/CAD:

Spot: 1.2547

USDCAD recovered back above the 1.2500 level after last night’s report indicated the US may pull out of Nafta, thus tempering bets the Bank of Canada will hike rates next week. The pair still remains below the previous key level of 1.2650 though; any shift in momentum bias to the upside would require 1.2650 to be breached first.

To the downside, the September low of 1.2062 represents the next support point.

USD/CNH:

Spot: 6.5234

USDCNH pared a previous day’s drop on Thursday, putting some distance between itself and the psychological 6.5000 handle. The key support lies along the 6.4436 level – the lows in both 2016 and 2017; significant yuan selling is expected around here.

USD/JPY:

Spot: 111.68

USDJPY pared some yesterday’s big decline, rebounding from a 5-week low earlier today to its 200-day moving average of 111.71. The sharp selloff in the yen earlier this week occurred after the BOJ’s surprise reduction in tis JBG purchases on Tuesday.

Nevertheless, the yen continues to trade between the range of 111 and 114.50, a common trend over the last 3 months. The key resistance at 114.50 – a break above could drive the pair further up towards 118.

GBP/USD:

Spot: 1.3502

GBPUSD declined to 1.3500 earlier today, despite better industrial and manufacturing production numbers released yesterday. The currency pair’s recent rise has taken a pause this week, after rising to a high of 1.3613 last Wednesday.

The ongoing Brexit uncertainty continues to be a negative influence on GBPUSD, with today’s decline being attributed reports indicating the EU and Germany are unwilling to allow Britain to offer financial services within the EU after Brexit. The EU is also reported to have written to a number of different industries warning about the prospect of a no-deal outcome.

Further uncertainty pertaining to Brexit could drive the pair lower to the 1.3300 support.