Issue#: 508/2019

Spot values at a glance:







Daily Observations:

Asian equities fluctuated near6-week highs as investors assessed prospects for global policy makers to arrest a slowdown in growth. The pound and UK stock futures fluctuated, paring losses, in advance of a no-confidence vote in British Prime Minister Theresa May following the resounding defeat of her Brexit deal. Earlier, the S&P 500 Index climbed the most in a week following China’s plans for boosting spending through tax cuts. The 10yr Treasury yield held at 2.71%, while oil traded around $52/bbl in New York.


May Loses Brexit Vote:

Prime Minister Theresa May’s Brexit deal was rejected by Parliament in a humiliating defeat, her plan for leaving the EU all but dead. She now faces a confidence vote in her government. The House of Commons voted 432 versus 202 against the divorce the UK government brokered with the EU. A margin of less than 60 would have given grounds to hope that the deal was salvageable, with the EU poised to engage in ways to make it more palatable. Now, more than 2 years after the nation voted to leave the 28-nation bloc, the UK is facing political paralysis over a decision that has divided the nation and its political class for decades. The largest parliamentary defeat in over a century prompted the main opposition Labour Party to pounce with a confidence motion to try to force a general election.

With the UK due to leave the EU in 10 weeks, there is growing alarm among British and European politicians that May will fail to end the impasse in time to avoid the potential economic catastrophe of leaving the EU without a deal. Any alternatives, including calling a second referendum, would likely require the EU to extend the March 29 departure deadline.

The prime minister said she will start cross-party talks this week to try to reach a consensus, but in such a febrile atmosphere they may already be doomed. Corbyn dismissed her offer as too little, too late.


US Government Shutdown Intensifies:

The Trump administration has ordered thousands of furloughed federal employees back to work without pay to inspect planes, issue tax refunds, monitor food safety and facilitate the sale of offshore oil drilling rights.

The efforts in recent days illustrate how President Donald Trump is trying to limit the impact of the partial government shutdown and shield favored industries as the funding impasse thwarts the deployment of new aircraft, stock offerings and even craft beers. The Obama administration took the opposite approach in 2013 by erecting barricades around open-air monuments and largely closing national parks — then leveraging public anger to blame Republicans for halted government services.

Critics say the Trump administration is skirting federal law by continuing some functions amid the political stalemate between congressional Democrats and Trump over whether to fund a wall on the US-Mexico border. A 149-year-old law bars agencies from spending money Congress hasn’t given to them, with only limited exceptions for “emergencies involving the safety of human life or the protection of property.”


China’s Tax-Cuts Strategy:

China’s government is turning increasingly to tax cuts as the first line of defense against a slowing economy, as credit data released Tuesday showed some vindication of its gradual stimulus strategy.

Further evidence of the dominance of fiscal measures emerged, as senior policy officials pledged that tax reductions on a “larger scale” are in the pipeline, amid worsening output and trade data. JPMorgan Chase & Co. economists estimate the total impact will be around 2 trillion yuan, or 1.2%t of GDP.

That’s a departure from the infrastructure binges coupled with massive monetary stimulus that were deployed in the aftermath of global financial crisis. Beijing is trying to put a floor under the economic slowdown without another debt blowout, with some success: Credit growth exceeded expectations in December, and the central bank has managed to curb riskier shadow banking throughout the year.

Last May the government cut value added taxes for manufacturing, transportation, construction, telecommunications and farm produce industries, followed by a cut in personal income taxes and the introduction of more deductions. Earlier this month, the State Council announced a $29-billion annual tax cut plan for small companies.

The change of approach is being driven largely by China’s debt load, which makes funding a splurge on bridges and railways dangerous for financial stability. Against the backdrop of slowing global growth and the trade war with the US though, it’s not clear whether the new approach will be enough to stabilize the economy.


Singapore Private Home Sales Slumped in December:

Private-home sales in Singapore halved in December from the month prior as developers marketed fewer projects and buyers decamped from the city-state on holiday. Developers sold 602 units last month versus 1,201 in November, the Urban Redevelopment Authority said in a statement Tuesday. That took the 2018 sales tally to about 9,246. The total number of apartments launched for sale in December was 101, compared with 1,342 in November.


Fed’s Kaplan Reiterates Call for Rate-Hike Patience:

Federal Reserve Bank of Dallas President Robert Kaplan said he wants the US central bank to take its time and watch how the economy evolves before it lifts interest rates again, but he’s not ready to call an end to the hiking cycle.

“I don’t think we should be prejudging or be predetermined about what we’re going to do — I do think though, for some period of time, and we’ll see what that time is, I think it’d be wise to be patient,” Kaplan told reporters in Plano, Texas, on Tuesday. “I’ve said a quarter or two, I don’t know — we’ll figure out in hindsight which it is — but I think it’s in the matter of months, not weeks.”

The Fed has lifted rates nine times since the end of 2015, including four rate increases last year. The Dallas Fed chief, who next votes on policy in 2020, said he thinks what happens next is far more important than the policy tightening so far.

Kaplan pointed to tighter financial conditions, slower global growth and early signs of weakness in some cyclical industries as reasons for patience in making additional rate increases. He said he’s watching the Fed’s balance-sheet unwind very carefully, and indicated that the Fed should be open to making adjustments to that plan, now on autopilot, if needed. He also said it’s possible the Fed could struggle to hit its 2% inflation target during the next economic downturn as structural forces such as globalization drag prices lower.


FX Updates:


Spot: 1.3554

USDSGD extended its recent rebound off the 1.3500 handle Wednesday, amid continued USD strength as the Dollar Index climbed back above 96. A rebound to 1.3610, the pair’s 200-day moving average, is expected over the near term. Over the longer-term, the bias remains to the downside, after the pair broke below its 1.3600-1.3875 range earlier this month.



Spot: 0.7199

AUDUSD continues to trade around the 0.7200 key level this week as Aussie traders struggle to pick an overall direction as broader market sentiment remains underbid but refuses to fall as traders await a push from China trade issues. From a longer-term perspective, AUDUSD’s 2018 downtrend remains intact; a break above the 200-day moving average of 0.7324 could change that.



Spot: 1.3266

USDCAD has continues to hold above 1.3200, following the pair’s plummet from the 1.3600 region earlier this month, amid a rebound in crude oil prices. Further progress in the US-China trade negotiations should prove to be CAD-supportive, as well as any sign that a potential Chinese slowdown could be losing traction. In addition, market participants would look to any changes in the renewed ‘patient and flexible’ stance from either the Federal Reserve or the Bank of Canada. In the near term, however, crude oil dynamics remain poised to rule the mood in CAD.



Spot: 6.7745

USDCNH rebounded Wednesday, after reaching a 6-month low last Friday and shrugging off poor economic data in China. The yuan has rallied 1.8% this year and is the third-best performer out of 11 Asian exchange rates tracked by Bloomberg. With the previous support at 6.8260 recently breached, the next support region to be tested lies at the pair’s 200-day moving average at 6.7274.



Spot: 108.47

USDJPY is currently fluctuating just above the 108 handle, as it has been for most of the past week. Political uncertainty in UK and the US, as well as dovish Fed expectations continue to weigh on the FX pair. The path of least resistance remains to the downside; a break below 108 is likely to trigger a wave down to the 106 handle.



Spot: 1.2857

GBPUSD finds itself heading into Wednesday little-changed from Tuesday’s opening prices, trading near 1.2850 ahead of the London market for the mid-week. With PM May’s Brexit withdrawal agreement defeated in the UK’s parliament, traders are looking towards what will come next in the slow-moving exit process: the UK’s main opposition leader Jeremy Corbyn has called for a parliamentary no-confidence vote in May’s government, but the measure is unlikely to succeed with the majority of the House of Commons not interested in handing over control of the country to Corbyn, instead wishing to see Brexit finally resolved. Odds are rising of an extension of Article 50, pushing out the final Brexit day, which means odds of a hard Brexit are declining, helping to prop up the Sterling once again.

GBPUSD remains murky, only thing that is certain is increased volatility until more light is shed on Brexit.  


Sources: Bloomberg

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UEN: 201419754M

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