Spot values at a glance:
Asian shares were higher on Friday following gains on Wall Street overnight, as concerns over an escalating US trade war with China took a breather. The pound slipped on the latest woes from the Brexit quagmire, while the yen weakened to a 6-month low as demand for safe haven assets ebbed. Gold and crude oil lingered near recent lows.
US & China Open Possibility to Talks Amid Rising Trade Tensions:
The US and China signalled they were open to resuming negotiations over trade after days of exchanging retaliatory threats, though Treasury Secretary Steven Mnuchin said Beijing must commit to deeper economic reforms.
High-level discussions over trade between the world’s two largest economies have stalled since June after a month of talks led by Mnuchin and Commerce Secretary Wilbur Ross with Chinese Vice Premier Liu He. Mnuchin told the House Financial Services Committee on Thursday that he and administration officials are “available” for negotiations, as he called US tariffs imposed on China a “modest” step aimed at levelling the playing the field.
Trump upped the stakes on Tuesday by moving forward with plans to impose further tariffs on $200 billion of Chinese imports, which could take effect as early as next month. China hasn’t yet outlined exactly how it will respond. Last week, the administration took its first direct tariff hit against China, slapping duties on $34 billion of Chinese imports with another $16 billion to soon follow, sparking tit-for-tat retaliation from China on US goods.
US Inflation Ticks Higher Year-on-Year:
US consumer prices rose 0.1% in June from the prior month, less than projected and restrained by falling utility prices and a record decline in hotel costs, Labor Department data showed Thursday. While that was slower than the 0.2% rise in May, inflation on an annual basis picked up slightly. What’s more, the 2.3% gain in the core gauge, which excludes food and energy costs, roughly matched the fastest pace of this expansion, hitting a 6-year high.
Other data on Thursday showed first-time applications for unemployment benefits dropped to a 2-month low last week as the labor market strengthened further. The tight jobs market is supporting inflation, and import tariffs, which are set to be broadened to include consumer goods, could fan price pressures.
China Exports Rose More than Expected:
China’s overseas shipments exceeded estimates in June even as the trade dispute with the US deteriorated, while imports slowed much more than expected.Exports rose 11.3% in June in dollar terms, the customs administration said Friday. Imports climbed 14.1%, below a forecast of 21.3%, leaving a trade surplus of $41.61 billion.
The largest exporting nation continues to benefit from robust global demand, but the increase in tensions and trade barriers with the US is weighing on the outlook. Both China and the US imposed 25% tariffs on $34 billion of the others’ imports on July 6, and Beijing has vowed to fight back against proposed tariffs on an additional $200 billion in Chinese goods.
The trade data comes ahead of the gross domestic product report for the second quarter, which should give a more complete picture of how the world’s second biggest economy did in the first half of this year. That is scheduled for release on Monday.
Trump Warns May Brexit Deal May Kill Off US Trade Deal:
President Donald Trump dealt a double blow to UK Prime Minister Theresa May, saying her plans for a soft Brexit would likely end hopes of a trade deal with the US and that Boris Johnson, who quit her cabinet this week, would be a “great” leader.
“If they do a deal like that, we would be dealing with the EU instead of dealing with the UK, so it will probably kill the deal,” Trump said in an interview in the Sun newspaper to be published Friday.
His comments in the Su, appeared after May had hosted Trump at a black-tie dinner at Blenheim Palace, the birthplace of Winston Churchill. On Friday he’ll have tea with Queen Elizabeth II at Windsor Castle, who he describes as “a tremendous woman.”
May wants to impress Trump and use his three-day visit to the UK to push for a trade deal with the US after the UK leaves the European Union next year, in a process known as Brexit. Relations with the US are a high priority for the prime minister’s trade policy.
But even before Trump arrived in the UK he attacked May’s Brexit plan, said the country was in “somewhat turmoil” and that meeting Russian President Vladimir Putin next week, her geopolitical enemy, would be easier than meeting her.
Curve Flattening Goes Global:
Bonds in Indonesia, India and Australia are witnessing a flattening of yield curves that’s showcasing the challenges these formerly-favored markets face as dollar liquidity tightens.
While Indonesia rushed to raise interest rates to stem a rout in the rupiah, continued weakness in the currency amid an emerging-market rout deepened by the U.S.-China trade war is fanning bets for further tightening. Aberdeen Standard Investments expects the nation’s yield curve to remain flat in the near term.
However, India, which last month increased benchmark rates for the first time since 2014, will probably see its curve steepening later in the year. The same is expected for Australia, with rising yields on US Treasuries seen driving the nation’s long-end borrowing costs higher.
Singapore Economy Growth Slows to 1-Year Low:
Singapore’s economy expanded at a slower pace than forecast in the second quarter, clouding the outlook for the export-reliant city state at a time when global trade risks are rising. Growth in Singapore’s economy, among the most trade-reliant in Asia, could ease further as an export boom moderates while risks are mounting. The nation is facing the threat of tariff wars, high oil prices, a global policy tightening cycle, and a US dollar appreciation, Bloomberg news reported.
On the domestic front, the government’s recent tightening of property curbs may slow the recovery in consumer demand, while putting the construction sector under more pressure.
While the impact of the US-China trade conflict so far has been limited, a worsening in those relations could have severe implications for the global economy, Ravi Menon, managing director of the Monetary Authority of Singapore, warned last week. Authorities are projecting growth of 2.5% to 3.5% this year.
USDSGD lingered near a 1-week high, after the pair recovered back above the 1.3600 a few days ago. Further consolidation between the 1.3500-1.3700 range is expected.
According to analysts from JPMorgan Chase & Co., the Singapore dollar is one of the few currencies to own during a US or global recession; the other currencies are the Swiss franc, US dollar and Japanese yen.
AUDUSD reclaimed the 0.7400 handle, shaking off bearish jitters from its overnight session. The longer-term trend remains skewed to the downside; the support lies at the pair’s year-to-date low of 0.7311. A climb back above 0.7600, which seems unlikely at this point, signals a possible reversal.
Following a strong up move to the 1.3200 handle on Wednesday, USDCAD turned lower last night to pare most of its previous gains. BOC Governor on Wednesday had warned that he economy might slow down in wake of growing trade tensions, which was perceived as dovish signal and prompted some aggressive selling around the Canadian Dollar.
With the 1.3050 support holding, the longer-term trend direction continues to be higher.
USDCNH retested its 11-month high of 6.7332 for the second time in a week last night, as Chinese officials stopped short of detailing retaliation measures against $200 billion of potential US tariffs. Despite this recent reprieve which might prove to be short-lived, further Sino-US tensions may continue to weigh on the yuan in months to come.
USDJPY was little changed earlier today after the pair surged past 112 yesterday to reach a 6-month high, as a rally in global equities continued to support risk-taking despite the ongoing US-China trade tensions.
Following the breakout above the key resistance at 111.40, the next key resistance target lies at 114.45.
GBPUSD declined to a 1-week low, slipping below the 1.3200 which had been a solid base in recent days, following Trump’s comments that UK PM May’s current “soft-Brexit” proposal may “kill” hopes of a US-UK trade deal. A retest of the year-to-date low at 1.3050 is possible over the coming week.