Spot values at a glance:
Stocks in Asia largely pared earlier declines triggered by China weakening the yuan’s daily fixing by the most in more than 2 years. The shift came after a sudden paring in the yuan’s drop, which spurred speculation of some type of intervention. Shares in China, Hong Kong and South Korea recouped losses, while Australian shares rose. Japanese stocks were lower at the lunch break. The offshore yuan pared some of the slide that pushed it to its weakest in more than a year against the dollar. Futures on the S&P 500 Index were lower, after US stocks saw moderate losses Thursday. Treasuries were little changed.
Onshore-traded yuan plunged 0.9% on Thursday, registering its biggest drop since 2015 on a closing basis, and taking most Asian currencies along for the ride amid broad dollar strength. Investors were caught off guard by the central bank’s seeming indifference to the yuan’s slide. The People’s Bank of China weakened its fixing beyond 6.7 per dollar Thursday for the first time since August 2017. With trade tensions between the Washington and Beijing simmering and possibly providing motivation for the Asian nation to let the yuan drop further, the volatility may continue.
The yuan’s weakness appears to already be drawing the ire of US President Donald Trump, who said to CNBC that the currency is “dropping like a rock,” putting America at a disadvantage.
Thursday’s slide had multiple drivers, including Federal Reserve Chairman Jerome Powell’s upbeat assessment of the US economy, a view that’s likely to keep the central bank on a gradual policy-tightening path. It’s also been punished by growing pessimism about the outlook for Chinese economic expansion amid the nation’s deleveraging drive, as well as concern about the fallout from a possible trade war between the world’s 2 largest economies.
Trump ‘Not Happy’ with Fed’s Rate Hikes:
President Donald Trump criticized the Federal Reserve’s interest-rate increases, breaking with more than 2 decades of White House tradition of avoiding comments on monetary policy out of respect for the independence of the US central bank.
“I’m not thrilled” the Fed is raising borrowing costs and potentially slowing the economy, he said in an interview with CNBC broadcast Thursday. “I don’t like all of this work that we’re putting into the economy and then I see rates going up.” The dollar relinquished gains from earlier in the day and Treasury yields dropped following the president’s remarks. “I am not happy about it. But at the same time I’m letting them do what they feel is best,” Trump added.
Trump’s remarks come as the US economy enjoys its second-longest economic expansion on record which has seen unemployment fall close to the lowest levels in 50 years. While the Fed has raised rates, they remain low on a historical basis.
The current target range for its policy benchmark is 1.75% and 2%. Subtracting inflation, the rate is slightly negative in real terms and still “accommodative” for growth and borrowing, as the Fed said in its June statement.
Trump Invites Putin to Washington:
President Donald Trump has invited Russian President Vladimir Putin to Washington this autumn, the White House said on Thursday, a daring rebuttal to the torrent of criticism in the US over Trump’s failure to publicly confront Putin at their first summit for Moscow’s meddling in the 2016 election.
4 days after Trump stunned the world by siding with Putin in Helsinki over his intelligence agencies, the president asked national security adviser John Bolton to issue the invitation to the Russian leader, said White House spokeswoman Sarah Sanders. What happened at Monday’s one-on-one between Trump and Putin with only interpreters present remained a mystery, even to top officials and US lawmakers who said they had not been briefed.
Fed Chair Powell Indicated Rates to Continue Rising “For Now”:
The US economy is running at a fast enough pace to justify continued interest rate increases, Fed Chairman Jerome Powell said Tuesday. Powell is delivering his semi-annual testimony to Congress this week, starting with an appearance Tuesday before the Senate Committee on Banking, Housing and Urban Affairs.
In remarks he provided ahead of a question-and-answer session, Powell painted a largely positive picture of the economy, which he said is expanding at an increasing pace and is being boosted by aggressive fiscal policy on Capitol Hill.
Saying that monetary policy “should be a mystery to no one,” Powell on Tuesday made clear the central bank plans to continue raising interest rate at a pace of once every three months, at least “for now.”
“With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate,” Powell told the Senate Banking Committee.
Powell remarks were upbeat. He said the economy was growing at a “solid pace,” and the unemployment rate was expected to fall further. Even the recent pickup in inflation, toward the Fed’s 2% target, was “encouraging,” he said. Powell pointed to “good news” in the decline in the unemployment rates for African Americans and Hispanics. While wage gains was moderate, “it also tells us that the job market is not causing high inflation,” he said.
At the same time, Powell admitted that trade wars and fiscal policy were key areas of uncertainty in the outlook. Senators from both parties pressed Powell on the impact of trade tariffs on the economic outlook. But the Fed chairman refused to get drawn out, sticking with his message that, in general, countries that embrace low tariffs and free trade have better economic outcomes.
Amid mounting concerns that a trade war could detail global growth, commodities have taken a hit, as indicated by the Bloomberg Commodity Index which has tumbled about 10% from a high in May.
As indicated in the chart, the lower panel shows the gauge’s moving average convergence-divergence indicator, a measure of price momentum known as the MACD, staying below signal line, suggesting there is no sign of reversal yet.
Copper, often viewed as a barometer of global economic growth, as slumped from this year’s high reached in early June as funds started closing their bullish bets and adding new bearish wagers. By July 10, money managers’ bearish wagers outnumbered their bullish bets on Comex copper for the first time since October 2016, according to U.S. Commodity Futures Trading Commission data.
Even gold, a traditional haven asset, failed to catch a bid as the dollar strengthened and the Federal Reserve signalled more increases in borrowing costs this year, curbing the investment appeal of the non-interest-bearing metal. The previous metal broke below its key $1,240/Oz support this week; more downside is expected with the next support sitting around the $1,200/Oz psychological level.
In addition to metals, agricultural products have been among the hardest hit in the commodities sell-off. US-China trade tensions may push soybean stockpiles 51% higher next year than expected a month earlier, the US Department of Agriculture said in a monthly global crop forecast July 12. Soybeans have taken center stage after China slapped tariffs on a swath of American farm goods.
On a more positive note, the energy and iron ore sector remains a bright spot for commodities. On Thursday, Saudi Arabia dismissed concerns the kingdom will flood the oil market. Instead, the country’s liaison to OPEC, Adeeb Al-Aama, forecast stockpiles will decline in the second half of the year because of robust demand and seasonal increases in consumption.
Efforts to clear the air in China may brighten the outlook for high-grade iron ore. The raw material may spike to $100 a metric ton as China intensifies a clampdown on pollution by restraining industrial activity, according to Wood Mackenzie Ltd. After sinking in March, top-quality ore with 65 percent iron content gained every month, trading above $91 a ton this week, and keeping it in positive territory this year even as global trade frictions mounted, according to Mysteel.com.
USDSGD retested its 1-year high of 1.3746 last night, before declining back to the 1.3700 mark. A break above the high is likely to drive the currency pair higher to its next resistance at 1.3916, last reached in June 2017.
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. The Singapore dollar’s safe haven status is likely to lead to its outperformance against its regional peers.
After surging higher on the back of a stellar Australian jobs report for June yesterday, AUDUSD reversed those gains, and more, succumbing to a renewed bout of investor risk aversion sparked by another sharp selloff in the Chinese yuan, sending it skidding towards a 1-year low against the US dollar.
Seen as a close proxy to the Chinese economy, the Australian dollar looks to be in line for more weakness; a break below 0.7300 could drive the pair lower to the 0.7160 support. Conversely, a climb back above 0.7600, which seems unlikely at this point, signals a possible reversal.
USDCAD held onto gains ahead of key Canadian CPI data tonight which could help shape the odds of another interest rate hike by the Bank of Canada (currently around 50%). Support for the FX pair remains around the 1.3050 level; the longer-term trend direction continues to remain to the upside with the key resistance lying at 1.3385.
USDCNH rose by as much as 0.5% to 6.8367 earlier today, its highest level in more than a year, and bringing its gain over the past 2 weeks to around 3%. The PBOC had earlier weakened its daily reference rate by the most in 2 years. Bets for further monetary easing and speculation the authorities are sanctioning the losses by not intervening have helped make the yuan the worst performer among more than 30 major currencies in the past month.
The next key resistance resides around the 6.8500 handle, last tested during end-June last year.
USDJPY pared declines earlier today, bouncing off the 112 handle. The pair had declined overnight following Trump’s comments on CNBC that he was not happy with higher interest rates. Following the breakout above the key resistance at 111.40 last week, the next key resistance target lies at 114.45.
Worst-than-expected UK retail sales sent GBPUSD pair to a fresh 2018 low of 1.2958 last night before Trump’s comments, which drove the greenback lower, helped GBPUSD regain back above 1.3000. However, the momentum remains firmly to the downside, and a decline back below 1.3000 is likely over the near term.