January 8, 2018

Daily Observations:

Asian equities edged higher ahead of the start of the region’s earnings season this week, after Wall Street boasted its best start to a year in over a decade. US nonfarm payrolls on Friday missed expectations, while that of Canada outperformed, boosting the odds of a Canadian rate-hike this month. The US dollar continued to hover near recent lows.

North & South Korea Set to Meet:

North and South Korean officials are slated to hold their first high-level meeting in more than two years at 10 a.m. Tuesday at a border village. The talks, focused primarily on North Korea joining next month’s Winter Olympics in nearby Pyeongchang, are the best chance to resurrect negotiations on Kim’s nuclear weapons program since US President Donald Trump took office.

In addition to the Olympics, South Korea plans to talk about opening a dialogue with the North Korean military and reuniting separated families, Unification Ministry spokesman Baik Tae Hyun told reporters in Seoul on Monday.

US December Payrolls Underwhelm:

Nonfarm payrolls in December rise 148,000 from 252,000 in the prior month, missing analysts’ estimates of a 190,000 rise, a Labor Department report showed Friday. The jobless rate was at 4.1% for a third month, while average hourly earnings increased by 2.5% from a year earlier, after a 2.4% gain in November that was revised downward.

According to Bloomberg news, the job gains, while below forecast, bring the 2017 total to 2.06 million jobs, below 2016 but slightly more than analysts had been expecting at the start of Donald Trump’s first year as president. With the economy at or near maximum employment, one of the Federal Reserve’s goals, the figures likely keep the central bank on track for continued gradual interest-rate hikes in 2018. While payroll increases have slowed over the past few years as the labor market tightens, economists say job gains above 100,000 a month are still enough to keep putting downward pressure on the jobless rate.

Fed Rate Hikes to Remain Gradual:

The Federal Reserve won’t need to pick up the pace of its planned interest-rate increases in response to the recently-passed tax overhaul package, White House chief economist Kevin Hassett said. US central bankers in December pencilled in 3 interest-rate increases for this year, the same pace they foresaw in September, even as they raised their forecast of 2018 economic growth to 2.5% from 2.1% in anticipation of the $1.5 trillion cut in business and household taxes, based on their median projections.

Canada Reports Stellar Jobs Report, Odds of Hike Rise:

Canada’s unemployment rate plunged to the lowest in more than 40 years, raising the odds of a Bank of Canada rate hike this month. The jobless rate fell to 5.7% in December, compared to the median estimate of 6.0%, Statistics Canada said Friday in Ottawa, the lowest in the current data series that begins in 1976.

78,600 jobs were added in December, beating the 2,000 gain predicted and bringing full-year employment gain to 422,500 – the best annual increase since 2002.

The economy showed unexpected resiliency as the year came to an end, with the figures indicating rapidly diminishing slack in the labor market that may quicken the expected pace of interest-rate increases by the Bank of Canada. The odds of a rate hike at the Bank of Canada’s next meeting on Jan. 17 soared to 70%, from 40% yesterday, based on trading in the swaps market.

UK Consumer Spending Down:

UK consumers curbed their spending for the first time in five years in 2017 as surging inflation and falling real wages took their toll on high street retailers. Visa’s UK consumer spending index slipped 0.3% last year from 2016. It also fell an annual 1.0% in December, the crucial Christmas shopping period for stores. It’s unlikely to recover this year, the credit card company said. Online sales growth slowed to an annual 2.0% last month, from 2.4% in November, while face-to-face spending slumped 2.7%, declining for an eighth straight month, Visa said

Abe Undecided on BOJ Governor Post:

Japanese Prime Minister Shinzo Abe on Sunday called on central bank governor Haruhiko Kuroda to keep up efforts to reflate the economy, but added he was undecided on whether to reappoint Kuroda for another five-year term. Abe also said the government would continue to work with the central bank to boost growth, so that he could declare an official end to deflation at the earliest date possible.

FX Updates:

USD/SGD:

Spot: 1.3285

USDSGD slid to the lowest since 2015 last Friday, following broad US dollar weakness since the start of the year. As shown in the chart below, the key support neckline between 2015 and 2017 was recently broken, confirming the downside breach of the currency pair’s 200-week moving average. This potentially indicates a shift in long-term momentum to the downside.

There have been increasing expectations that the MAS could tighten monetary policy as early as in April this year, in light of a recovery in the services sector.

AUD/USD:

Spot: 0.7847

AUDUSD retreated from 2-1/2 month highs Monday. 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.

With the Dollar Index holding around the 92 handle following its recent weakness, some rebound in the USD is expected to cap upside gains of AUDUSD to 0.7900 over the near term.

USD/CAD:

Spot: 1.2399

USDCAD slipped below the 1.2450 support, signalling more downside for the currency pair after Friday’s better-than-expected jobs report, which increased the odds of a Bank of Canada rate-hike in its next meeting this month.

The September low of 1.2062 represents the next resistance point.

USD/CNH:

Spot: 6.4828

USDCNH extended its recent drop last Friday, sliding below the psychological 6.5000 handle. The currency pair is poised to retest the key 6.4436 support – the lows in both 2016 and 2017; significant support is expected around here.

USD/JPY:

Spot: 113.19

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: 1.3564

GBPUSD lingered near post-Brexit referendum highs Monday, fluctuating below the 1.3600 handle. After a quiet start to the year, this week could see bigger bets come back into play for the pound, Bloomberg news reported, with the UK Parliament returning from recess and a slew of data due to be released.

A significant breakout above 1.3600 could drive the pair higher to around the pre-Brexit referendum low of 1.3850.