Issue#: 530/2019

Spot values at a glance:







Daily Observations:

Stocks in Asia dropped and the yen hit a two-week high on deepening concerns about a weak earning season and the consequences of a continuing trade battle between Japan and South Korea, two of the region’s four largest economies. Treasuries extended gains while US futures dipped.


Dalio Says Gold May Be Key to Paradigm Shift:

Ray Dalio thinks the current era of low interest rates and quantitative easing might be coming to an end, and his answer to a new market paradigm that could see escalating conflict between capitalists and socialists is simple – gold. “I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio,” the billionaire founder of investment management firm Bridgewater Associates said in a 6,000-word essay posted on LinkedIn.

For Dalio, monetary policy swings between helping debtors or creditors at each other’s expense, and the next move of the pendulum could lead to a new era of debt monetization and currency depreciation. “The big question worth pondering at this time is which investments will perform well in a reflationary environment accompanied by large liabilities coming due and with significant internal conflict between capitalists and socialists, as well as external conflicts,” Dalio said.

An alternative to invest in gold would be to buy into the Gold Miners Inverse-Volatility US portfolio on iAdvisor, which comprises of US-listed gold mining companies. In a world where rising debt is a concern, we employ a filtering process to ensure the companies selected satisfy certain debt ratio requirements. The portfolio has returned 9.4% month-on-month.


Fed’s Beige Book Generally Positive:

The US economy expanded at a modest pace with job gains slowing somewhat and inflation remaining stable or slightly weaker, a Fed survey showed. “The outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty,” according to the report Wednesday in Washington.

The central bank’s Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks on or before July 8, said the labor market continued to tighten, putting some upward pressure on compensation. However, some manufacturing and technology firms in the Northeast reduced staff.

The report is unlikely to sway the debate policy makers will have when they gather July 30-31. Officials are widely expected to reduce interest rates by a quarter point, though a handful of regional Fed presidents appear uneasy about cutting rates while their baseline economic outlook remains solid. Despite the labor market’s continued strength, firms still struggled to pass on higher wages and new tariffs to customers, the report said. The Fed’s favorite gauge of inflation showed prices rose just 1.5% in the year through May. Inflation has run persistently below the central bank’s 2% target for most of the past seven years.


Traders Pricing in 75bp Cut in 2019:

Futures traders are close to pricing in three-quarters of a point of easing by the Federal Reserve this year following a slide in front-end interest-rates. The implied yield on the January fed funds contract fell 4.5 basis points to 1.675% on Wednesday as Treasuries rallied across the curb and mixed results from US companies such as CSX Corp. weighed on stock futures. With the current effective fed funds rate at 2.41%, the market is now pricing in 73.5 basis points of easing for the remainder of 2019, or close to three standard-sized quarter-point cuts.

Moves in front-end rates may also be impacted by Treasury-bill investors who are keeping a keen eye on the debt-ceiling debate. House Speaker Nancy Pelosi said she wants a deal on raising the US debt limit and setting spending levels before Congress leaves for its August recess, but an official from the administration of US President Donald Trump said there’s still a long way to go to reach an agreement on the budget.


Uncertainty in Debt Limit Deal Still High:

According to Bloomberg news report earlier today, House Speaker Nancy Pelosi said she wants a deal on raising the US debt limit and setting spending levels before Congress leaves for its August recess, but a Trump administration official said there’s still a long way to go to reach an agreement on the budget.

Failure to agree on a package before the House leaves for recess next week could force Congress to settle for a short-term debt limit fix and delay the tougher discussion about spending levels. The Treasury-bill market is showing signs of concern, with small pricing dislocations appearing around securities maturing close to potential crunch dates in September and October.

Congress doesn’t have to attach a budget agreement to a bill raising the debt limit, but leaders of both parties want to use that must-pass bill to resolve some of their other fiscal deadlines. If they don’t bridge disagreements over extra funding for veterans’ health and how to pay for spending increases, Treasury Secretary Steve Mnuchin said Congress should pass the debt limit increase without the budget deal.

The other fallback option, a short-term increase for the Treasury’s borrowing authority, would push back by a few months the date at which the US risks missing payments.

The impasse before House members leave Washington on July 26 for a 6-week recess shows how major congressional decisions are regularly left to the last minute, risking collateral economic damage. Pelosi has been leading the negotiation in a series of phone calls with Mnuchin, seeking a deal she can sell to her divided caucus.

The Treasury Department has been using so-called extraordinary measures to meet debt obligations since March 2, when the US reached its $22 trillion limit on borrowing. Mnuchin on Monday said one scenario shows the US could risk default in early September, before lawmakers return from their summer recess.


US-Iran Tensions Continue to Simmer:

The US “shot itself in the foot” by pulling out of the nuclear accord with Iran, Foreign Minister Javad Zarif said, offering a grim outlook for the chance of opening talks with President Donald Trump.

Zarif, in an interview Wednesday with Bloomberg Television, also accused European countries that are part of the agreement of failing to carry out their own commitments under the 2015 deal and after the US withdrawal. He said promises to allow Iran to sell oil and repatriate money have failed to materialize.

Addressing US allegations that Iran has never given up its goal of building nuclear weapons, Zarif said Iran has the technical ability to pursue them “very rapidly” but “we’re not going to” because Supreme Leader Ayatollah Ali Khamenei made a “religious commitment” that they are forbidden, Zarif said in the interview with Bloomberg. “If we wanted to build nuclear weapons, we could have built it a long time ago,” said Zarif, who was in New York to address a UN meeting.

Nevertheless, Zarif signaled that Iran will continue to pursue what he called the Islamic Republic’s rights under the accord to respond to the US withdrawal and failed European efforts to deliver promised benefits to the Iranian economy.

Tensions have soared in the Persian Gulf region since the Trump administration stopped issuing sanctions waivers for buyers of Iranian oil and reimposed crippling economic measures against Tehran. In response, Iran has started gradually breaching parts of the nuclear accord, confirming in July that it had surpassed agreed caps on its stockpiles of enriched uranium and exceeded the allowable level of enrichment.

The threat of conflict appeared to climb even higher following a spate of attacks on ships in the Persian Gulf region in May and June, the downing of an American drone last month and the recent British seizure of a tanker carrying Iranian crude, which UK officials said was violating sanctions by heading toward Syria. Last month Trump said he called off retaliatory strikes on Iran over the drone, which US officials claim was over international waters and Iran says was over their territory.


Australia Employment Steadied in June:

Australian employment rose 500 in June as a slide in part-time positions countered gains in full-time work.  Jobs increase compared with economists’ forecast of a 9,000 gain; the unemployment rate remained at 5.2%, as expected by economists. Fulltime positions rose 21,100 while part-time roles declined 20,600. The participation rate remained at 66%.

The RBA had recently executed its first back-to-back interest-rate cuts in seven years as it redoubles efforts to drive unemployment down to 4.5%, the bank’s new estimate of the rate needed to reignite inflation. In lowering the level seen as full employment, RBA Governor Philip Lowe is following in the footsteps of other developed-world counterparts, who’ve had to wait for their jobless rates to fall to exceptionally low levels to spur wage growth and even then it has proved a prolonged wait for it to feed into inflation. Some economists expect Lowe will resume cutting later this year, seeing a terminal rate of 0.5%, compared with the current 1% level.


Singapore to Combat Climate Change:

Singapore will invest S$400 million over the next 2 years to upgrade its drainage systems, Masagos Zulkifli, minister for the environment and water resources, said at a conference in the island city on Wednesday. That’s on top of about S$1.8 billion the country has already spent since 2011 to boost flood resilience, he said.

With almost one-third of Singapore just five meters above sea level, the city is trying to make sure its critical infrastructure remains safe. The country has built a new port in the western part of the island and a fifth terminal at Changi airport on higher platform levels, Zulkifli said. The country is also studying how to protect low-lying areas around its coast from disappearing if water levels rise. One way is to use polders, or dykes, to reclaim land.


Singapore Exports Slump:

Singapore’s exports plummeted in June amid a worsening trade war, spelling more bad news for the city state’s economy.

Non-oil domestic exports contracted 17.3% from a year ago after falling a revised 16.3% in May, Enterprise Singapore said in a statement on Wednesday. That was worse than the median estimate of a 9.6% decline in a Bloomberg survey of economists.

The trade-reliant economy took a sharp downturn in the second quarter, prompting analysts to downgrade growth forecasts for this year and predict a possible recession. Exports have been weakening since last year as a technology boom waned, but the outlook worsened considerably in 2019 amid a US-China trade war, which is weighing on China’s economy. Singapore’s electronics exports plunged 31.9% in June from a year ago after dropping 31.6% in May. The biggest contractions in overall shipments were to Hong Kong (-38.2%), Japan (-23.2%) and South Korea (-22.7%).


Sources: Bloomberg


FX Updates:


Spot: 1.3593

USDSGD continues to struggle to reach its 200-day moving average, currently at 1.3634, retreating from it and back below 1.3600 earlier today, following overnight USD weakness. SGD has experienced recent weakness following a deepening slump in the nation’s exports, which has fueled speculation the central bank will ease policy in its October review.



Spot: 0.7028

AUDUSD rebounded off 0.7000 and rose earlier today, after data showed fulltime jobs growth in Australia picked up pace in June, and in turn eases pressure on the RBA to cut rates for a third straight time in August. The longer-term trend remains to the downside, but a break above 0.7100 could change that.  The support below remains along 0.6828.



Spot: 1.3045

USDCAD has recently broken below its key 1.3069 support, although 1.3000 is proving to be a resilient support to break. The Canadian dollar is having the best year of any major currency, but there’s concern about its near-term outlook among analysts at some of the nation’s top banks. They’re worried the loonie could pay the price if Canadian economic data fail to sustain a recent string of strong results as trade barriers and protectionism mount.



Spot: 6.8778

USDCNH was little changed Thursday, even as reports from both China and US pointed to a possible impasse in trade negotiations. The IMF earlier today rejected claims of PBOC yuan currency manipulation.



Spot: 107.72

USDJPY fell to a 2-week low as global trade risks fuelled safe haven demand in the yen. The strong rejection at the 109 resistance last week could signal more downside for the currency pair. A revisit of the June lows around 106.75 could be on the cards, especially if the risk-off sentiment intensifies.



Spot: 1.2438

GBPUSD rose earlier today, from a 26-month low yesterday. Today’s rise is expected to be short-lived, with the pair poised to retreat back below 1.2400 on intensifying fears of a hard Brexit. Morgan Stanley has predicted the pound to fall to parity with the dollar in the event of a no-deal Brexit.  


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UEN: 201419754M

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