January 24, 2019

Daily Observations:

Most Asian stocks traded higher Thursday as investors awaited fresh developments on US-China trade talks and signals on how deep the global economic slowdown will be. Investors continue to operate in a drought of data on the US economy thanks to the partial federal government shutdown. The 10yr US Treasury yield traded near 1-week lows. The S&P 500 Index closed with a small rise Wednesday.

China Pledges Sustainable Growth:

China’s vice president said the world’s second-largest economy has delivered “significant” growth and pledged to the World Economic Forum in Davos, Switzerland, that it won’t falter. “There will be a lot of uncertainties in 2019, but something that is certain is that China’s economy, China’s growth, will continue and will be sustainable,” Wang Qishan said in response to a question after a making a keynote speech to business leaders Wednesday. Wang’s comments followed a government report Monday that gross domestic product expanded 6.6% last year, the slowest pace since 1990 and in line with estimates. “This is a pretty significant number, not low at all,” Wang said.

Also Monday, President Xi Jinping stressed the need to maintain political stability in an unusual meeting of top leaders, a fresh sign the ruling Communist Party is more concerned about the social implications of the slowing economy. Xi told officials the party needs greater efforts “to prevent and resolve major risks,” the official Xinhua News Agency said.

US Government Shutdown Intensifies:

US House Speaker Nancy Pelosi said she won’t let President Donald Trump give his State of the Union address in her chamber unless government agencies have been reopened, a further escalation of the feud between the two leaders. In a letter to Trump on Wednesday, the speaker said that when she invited the president to give the address on Jan. 29, “there was no thought that the government would still be shut down.” The Democratic-controlled House and the Republican-controlled Senate must pass a joint resolution to allow Trump to deliver the speech to a joint session of Congress. The House won’t consider such a resolution, Pelosi said in her letter. The resolution is usually a routine formality taken shortly before the event.

The president last week denied Pelosi a military plane for an unannounced trip to visit US troops in Afghanistan a day after she suggested a delay in the speech. The running dispute has added to the difficulty of finding a resolution to the partial government shutdown that began on Dec. 22.

In suggesting last week that the address be rescheduled, Pelosi cited security concerns because Secret Service agents and Department of Homeland Security staff aren’t being paid during the shutdown. Pelosi accused the Trump administration on Friday of endangering her safety by leaking her plan to take a commercial flight to Afghanistan to visit US troops after the president canceled her use of a military plane.

Australian Dollar Expected to Extend 2018 Losses:

After being the worst-performing developed-nation currency in 2018, the Aussie is set to extend losses this year as rising indebtedness at households and the economy overall make it more likely the Reserve Bank of Australia will cut interest rates, according to both HSBC Holdings Plc and Rabobank. HSBC sees a further 7% slide to US$0.66 by year-end, while Rabobank tips US$0.68.

Australia’s household debt-to-income ratio has skyrocketed to 189% from 67% in the 1990s, according to data compiled by the RBA. The increase has gathered pace in recent years as a decline in interest rates encouraged households to take on more borrowing, while an easing of constraints on bank lending increased the funds available, RBA Assistant Governor Michele Bullock said in a speech in September.

Australia’s dollar has already tumbled for 5 straight quarters, including a decline of 9.7% last year, as the US-China trade war and signs global growth is slowing has sapped demand for the export-reliant currency.

HSBC is bearish on the Aussie due to the country’s debt binge and also the widening yield discount on Australian bonds compared with US Treasuries. Rabobank sees the RBA cutting the nation’s benchmark rate by another 100 basis points from the already record-low 1.5% to help manage the debt burden. There’s a 39% chance the Aussie will touch US$0.66 by year-end, according to data compiled by Bloomberg based on option prices. A year ago, the same projection for December 2019 had a probability of only 14%.

Calls to Delay Brexit Reduces Risk of No-Deal:

The risk of a no-deal Brexit appears to be receding after calls for a delay to the UK’s exit from the European Union won powerful backing in London and other EU capitals. The pound rose. Senior figures in the French and German governments said they’d be open to extending the Brexit deadline as momentum built for a delay in the UK Parliament.

Yet the issue remains toxic for Theresa May. The UK prime minister is caught in the crossfire between pro-EU members of her Conservative Party who are seeking to force her to postpone Brexit, and staunch euroskeptics who are threatening to bring down her government if she does.

Time for reaching a decision is running out. If the UK can’t agree to a deal in the next 9 weeks, the country will leave the EU on March 29 in a disorderly split that British authorities warn will risk a recession, and a hit to the pound of as much as 25%. May herself remains unpersuaded of the case for a delay, although she stopped short of ruling out an extension to the withdrawal deadline, set out in Article 50 of the EU’s Lisbon Treaty.

The question of a delay could be taken out of May’s hands. Next week Parliament is slated to vote on a series of options for Brexit’s next steps, including a proposal to force the government to ask the EU to extend Article 50. Opposition Labour Party Leader Jeremy Corbyn met with Yvette Cooper, the architect of the cross-party move that would mandate a delay if there’s no deal Parliament can support.

Labour’s Cooper has drafted the proposal with Nick Boles, a Tory. So far, at least 58 politicians from five parties have put their names to the plan. If Corbyn’s Labour Party formally backs it, the Cooper-Boles option is almost certain to succeed. The party’s Brexit spokesman, Keir Starmer, suggested the party might well swing in behind the plan.

Australian Unemployment Falls to 5%

Australia’s unemployment rate fell back to 5% as the labor market withstood a plunge in property prices that’s threatening household spending. The economy added 21,600 jobs in December, driven by part-time roles and exceeding economists’ median estimate of an 18,000 gain, data showed in Sydney Thursday. The fall in the jobless level was aided by fewer people seeking work as the participation rate eased slightly.

While unemployment, a key metric for the RBA, has fallen over the past year, it hasn’t tightened the market sufficiently to drive faster wage growth. That’s because underemployment, people who want to work more hours, remains elevated at a record gap above the jobless rate. Data last month showed weaker household spending slowed economic growth in the third quarter.

Still, a 2-year hiring bonanza has encouraged policy makers that running a record-low cash rate of 1.5% will eventually tighten the labor market to an extent that firms will have to raise wages. That should then boost inflation that’s hovered at or below the bottom of the RBA’s 2 to 3% target.

FX Updates:

USD/SGD:

Spot: 1.3585

USDSGD’s recent rebound off the 1.3500 handle stalled just below the pair’s 200-day moving average of 1.3624; USD pared recent gains but the Dollar Index continues to hold above 96. Over the longer-term, the bias remains to the downside, after the pair broke below its 1.3600-1.3875 range earlier this month.

AUD/USD

Spot: 0.7124

AUDUSD declined to 2-week lows, amid concern a rise in mortgage rates will dent economic growth. National Bank of Australia said it’s increasing rates for both owner occupiers and residential investor borrowers effective Jan. 31, joining other major lenders in boosting mortgage costs. Over a longer-term perspective, AUDUSD’s 2018 downtrend remains intact; a break above the 200-day moving average of 0.7324 could change that.

USD/CAD:

Spot: 1.3344

USDCAD rose to a 2-week high, with the loonie being weighed down by crude oil’s retreat back below $53/bbl. In addition, overnight data showed a larger-than-expected decline in retail sales in November in Canada. Despite USDCA’s sharp decline in early-Jan, the longer-term trend remains to the upside.

USD/CNH:

Spot: 6.7932

USDCNH slipped back below 6.8000 today, after Vice President Wang Qishan, in Davos, pledged sustainable growth this year and delivered a thinly veiled rebuke of US economic policies. The yuan has rallied by as much as 2% 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 6.7431.

USD/JPY:

Spot: 109.53

USDJPY tested its 110 last night, but has since retreated back to 109.50. The BOJ kept key policy tools unchanged yesterday and revised lower its inflation and growth forecast, reinforcing the view that the central bank is unlikely to scale back the unprecedented stimulus any time soon. Only a pullback in US Treasury yields resulted in a failure to break above 110. Further consolidation around current levels are expected over the rest of the week..

GBP/USD:

Spot: 1.3075

GBPUSD has rallied in recent days on fresh optimism over soft Brexit prospects as we get down to the last sand granules of the hourglass before the next key date on the timeline towards ‘the scheduled’ Article 50 Brexit date. The pair is currently testing its 200-day moving average of 1.3065; a break above is likely to trigger another wave to the next resistance at 1.3300. However, over the short-term, a minor pullback is expected, perhaps back to 1.3000.   

Sources: Bloomberg