July 21, 2017

Daily Observations:

The US dollar largely weakened to its lowest in almost a year as investors assess an investigation into US President Trump which may stall his economic agenda. Asian equities were mixed earlier today, taking a breather after recently reaching new highs. Gold gained to its highest level this month, while crude oil retreated.

US:

• Robert Mueller, the US special counsel heading the probe into potential ties between Donald Trump’s campaign and Russia, is examining the president’s business transactions, Bloomberg reports, including investors who bought apartments in his buildings. This expansion of the investigation crosses what Trump had just declared to be a “red line.” In the event the president wanted to remove the special counsel, he would first have to find a person willing to act as attorney general to do so. Attorney General Jeff Sessions, whom Trump disparaged in a recent interview with the New York Times due to Sessions’ decision to recuse himself from the inquiry, said he won’t quit.
• The Philadelphia Fed business outlook index fell to 19.5 in July, from 27.6 in June, worse than the 23.0 predicted.
• It won’t take much for the Fed to raise short-term interest rates too far, triggering an economic reversal making indebted students, corporations and other borrowers unable to repay loans, according to billionaire bond manager Bill Gross. If short-term rates rise faster than long-term rates, it causes a flattening yield curve, historically often a precursor to recessions, such as the 2007-2009 financial crisis.
• The US dollar continued to weaken, following the expanded investigation by Special Counsel Mueller on Trump. The Bloomberg Dollar Spot Index fell 0.3% in New York to a new 11-month low.
• The benchmark 10yr Treasury yield ended 1bp lower to 2.26%, paring an original decline of as much as 3bps following a poorer-than-expected 10yr TIPS auction.
• The Nasdaq Composite rose 0.1% to close at an all-time high for a third straight day. The S&P 500 Index was largely unchanged on the day. Telecommunication stocks led gainers, while materials and industrials equities weighed down the index.

Europe:

• The European Central Bank kept policy unchanged and signalled it would be ready to step up its quantitative easing program if need be. President Mario Draghi said the central bank is “not there yet” on inflation, and more discussion on dialling down its stimulus will likely have to wait until the fall.
• Thursday’s announcement comes 6 weeks after the ECB took an initial step toward winding down unconventional monetary policy by dropping the wording on additional interest-rate cuts and stating the risks to the economic outlook had become broadly balanced.
• Yet officials face a conundrum because, as ECB President Mario Draghi noted last month, the region’s stronger economic growth has had an unusually muted impact on consumer prices. The headline inflation rate, which clocked in at 1.3% in June, remains a considerable way off the 2% price-stability goal.

Greece:

• The IMF agreed to a new conditional bailout for Greece, ending 2 years of speculation on whether it would join in another rescue and giving the seal of approval demanded by many of the country’s euro-area creditors. Its executive board approved “in principle” a new loan worth as much as $1.8 billion, with the disbursement of funds being contingent on euro-zone countries providing debt relief to Greece.

Japan:

• The BOJ retained its dovish tilt yesterday by reiterating its commitment to monetary stimulus and emphasizing downside risks to the outlook for inflation and activity. Policymakers cut their inflation forecast for a sixth time in the decision, implying a need to keep policy very accommodative through the end of the decade, according to some strategists.

China:

• While up to now policy makers have focused on a build-up of liabilities at smaller banks and big private-sector companies, President Xi Jinping has made clear that local government authorities and China’s behemoth state-owned enterprises too must restrain borrowing. According to Bloomberg news, Communist Party officials have for decades risen through the ranks by borrowing to fund growth — whether at local authority levels or atop an SOE monopoly. The party has kept a national growth target, making it a challenge to change cadres’ mentalities.
• Xi’s remarks at the July 14-15 conference of top financial regulators showed he wants broad action to address wasteful borrowing. China should view curbing SOE leverage as “the priority of priorities,” and hold officials accountable “for a lifetime” for building up regional debt. Rather than stressing the need to limit credit in the financial system, he focused on reducing borrowing in the entire economy.

Australia:

• RBA Deputy Governor Guy Debelle said there was no significance in the board discussing the neutral rate, a comment in the central bank’s minutes earlier this week that had helped drive AUDUSD to just shy of the 0.8000 handle. RBA policy makers had said in meeting minutes, released earlier this week, that a neutral nominal cash rate is estimated at around 3.5%.

Precious Metals:

• Spot gold gained 0.9% to $1,247.64/Oz, its highest level month-to-date, and looks poised to notch its first back-to-back weekly advance since June 2 as USD weakness and a more-dovish-than-expected statement from ECB President Draghi buoyed demand for the precious metal.
• The next resistance lies around the $1,260/Oz handle and was last tested in June.
• Silver for immediate delivery rose by as much as 1.4% t0 $16.4255/Oz, before paring back gains earlier today. Downside risk continues to remain high with the resistance looming near at $16.50/Oz; the next support below comes in around $15/Oz.

Oil

• Crude oil futures expiring in September declined 0.9% to $46.92/bbl in New York, as investors weighed increasing American crude production against a decline in US and Saudi Arabian stockpiles.
• US crude inventories dropped 4.7 million to the lowest since January, while output rose to the highest since July 2015, the Energy Information Administration said this week.
• Saudi Arabia’s crude stockpiles slid in May to the least in more than 5 years, according to Riyadh-based Joint Organisations Data Initiative.
• Meanwhile, Iran is proceeding with plans to boost output to 5 million barrels a day by the end of the year, its oil minister said on Wednesday.

Cryptocurrencies:

• Bitcoin rallied as much as 16% to $2,624.87, the most since May 22, on optimism that a split of the digital currency will be avoided. Bloomberg News reported last week that about 85% of the miners who deploy costly computers to verify transactions and act as the backbone of the blockchain technology have signalled they are willing to run software which aims to bridge an ideological gap that has threatened to divide the cryptocurrency. The software, known as SegWit2x, is set to be released July 21.

USDSGD:

• Spot 1.3671
• USDSGD retreated back below 1.3700, falling 0.4% to 1.3548 – a fresh 9-month low.
• The next important support handle below comes in around 1.3500.

AUDUSD:

• Spot 0.7885
• AUDUSD retreated from a 2-year high, falling 0.5% on the day to 0.7875, after the RBA’s Debelle downplayed rate hike expectations.
• A fall for the currency pair back to the ex-resistance level of 0.7835 is possible.

USDCAD:

• Spot 1.2597
• USDCAD pared an earlier drop of as much as 0.7% to a fresh 14-month low of 1.2541, recovering back to the 1.2600 handle following an overnight decline in crude oil.
• The Canadian dollar has been the best performing currency in the world over the past 2 months. The next bastion of support lies at 1.2460 – the pair’s 2-year low.

USDCNH:

• Spot 6.7632
• The PBOC strengthened its fixing to 6.7415 today, from 6.7464 per US dollar yesterday.
• USDCNH pared an overnight drop of 0.2%, following a weaker yuan as the Comprehensive Economic Dialogue in Washington ended in deadlock, with the US and China failing to agree any major steps to reduce their trade deficit.
• The 9-month low of 6.7234, established in early June, continues to act as a key support.

USDJPY:

• Spot 111.96
• USDJPY recovered back from a drop yesterday, rising back to the 112 handle today. Continued yen weakness is expected following the BOJ’s decision yesterday to push back its forecast for achieving its inflation target.
• A move back up to the 114.50 resistance is likely.

GBPUSD:

• Spot 1.2966
• GBPUSD retreated back below its 1.3000 support yesterday, and pared back declines slightly although the pair continues to languish below 1.3000.
• Renewed weakness in sterling has surfaced this week, largely due to slower-than-expected inflation gains in June, thus reducing the chances of an imminent interest-rate increase by the Bank of England.
• Following the decline back below the 1.3000 handle, further weakness looms ahead for the pound with a probable target of 1.2800 for GBPUSD over the near term.