July 24, 2017

Daily Observations:

Stocks in Asia were mixed, with declines in Singapore, Tokyo, Seoul and Sydney, and gains in Shanghai, Hong Kong, Bangkok and Jakarta. Investors remain wary ahead of a week packed with earnings results and a Federal Reserve interest-rate decision. Oil extended declines before an OPEC meeting on Monday. Political uncertainty within the White House continues to drive the US dollar lower and buoy gold.

US:

• Politics remained at the froe front in the US last week, with reports that special counsel Robert Mueller is expanding his investigation to include Trump’s business dealings and the president telling the New York Times that any digging into his finances would cross a red line. Meanwhile, White House Press Secretary Sean Spicer resigned Friday as Trump named financier Anthony Scaramucci communications director.
• Investors in US Treasury bills are going to have to navigate 2 major challenges with a potentially contradictory impact: The looming government debt-ceiling impasse and the long-awaited start of the Federal Reserve’s unwinding of its massive balance sheet. Some Wall Street analysts say that the Treasury may need to start slashing bill supply as soon as next month to avoid exhausting its borrowing authority, causing bill rates to drop. Meanwhile, the bill market risks getting caught up in any Fed move to taper its $4.5 trillion bond portfolio, which could lead Treasury to boost bill offerings, pushing rates higher.
  
• US yields fell across the curve Friday, with the benchmark 10yr Treasury yield declining 2bps to 2.24%.
• The US dollar maintained near lows today; the Bloomberg Dollar Spot Index remained mostly unchanged for the day earlier after closing 0.3% down on Friday at a fresh 14-month low. US dollar weakness continues to be driven by political uncertainty in the US.
• All 3 major US equity indices edged lower Friday, with energy shares leading decliners. Industrial shares also struggled, led lower by General Electric Co., which dropped 3% on the company’s warning that earnings for the year will likely be at the near bottom of its projected range. However the S&P 500 and Nasdaq Composite extended gains for a third straight week.

Canada:

• Canada’s core consumer prices and retail sales came in faster than expected, signalling that overall inflation may turn around to clear the way for another rate increase this year.
• The average of the central bank’s 3 core inflation measures rose to 1.4% in June, Statistics Canada said Friday from Ottawa, up from a May reading of 1.3% that was the lowest since 1999, and more than the median estimate of 1.3% as well.
• Headline CPI over the same period gained 1.0%, lower than the 1.3% gain in May.
• Retail sales doubled economist forecasts for May with a 0.6% increase, bringing the year-over-year gain to 7.3%, more than double the average over the last decade.

China:

• China’s small-caps gauge, the ChiNext Price Index, has a current valuation based on reported earnings of 36.2, compared with 34.3 for the Nasdaq Composite, leaving the narrowest gap since the Chinese board started in 2010. The ChiNext, which is made up of mostly technology companies, has plummeted 25% in the past year, while the U.S. gauge has climbed more than 25% as of Friday.
  

Precious Metals:

• Spot gold gained 1.5% to $1,254.98/Oz Friday, its highest level in almost a month, and notched its first back-to-back weekly advance since June 2, largely driven by recent US dollar weakness and political instability in the White House.
• However, holdings in SPDR Gold Shares, the world’s biggest ETF backed by bullion, plunged last week to its lowest since February.
• The next resistance lies around the $1,260/Oz handle and was last tested in June.
• Silver for immediate delivery gained 2.0% Friday, advancing beyond the $16.50/Oz handle. The metal however pared 0.3% back today, falling to $16.4545/Oz. The resistance at $16.50/Oz is key, with downside risk remaining high if silver fails to break above it; the next support below comes in around $15/Oz.

Oil

• Crude oil futures expiring in September slumped 3.2% in New York to $45.77/bbl ahead of OPEC’s meeting later today to discuss the progress of supply cuts enacted to curb output. However, according to people familiar with the matter, limiting output from Libya and Nigeria, which are exempt from the curbs, won’t be on the agenda in today’s meeting.
• Nigeria signalled earlier this month that it would cap production when it can stably pump 1.8 million barrels a day.
• The IMF has lowered its 2017 growth estimate for Saudi Arabia to just above zero, citing austerity and these oil production cuts.  Saudi Arabia’s oil exports to the U.S. have sunk to their lowest level in 7 years.
• China, meanwhile, is shifting some of the oil product glut to the rest of the world with surging exports of diesel and gasoline.
• In the US, drillers targeting crude reduced the rig count by 1, according to data from Baker Hughes Inc.

USDSGD:

• Spot 1.3628
• USDSGD maintained near a 9-month low earlier today, after dropping 0.6% to 1.3628 on Friday.
• The next important support handle below comes in around 1.3500, although a rebound back up to either 1.3700 or 1.3750 is more likely to occur first.

AUDUSD:

• Spot 0.7919
• AUDUSD investors are bracing for a week of volatility, with the Australian 2Q CPI and a speech by RBA Governor Lowe both occurring on 26 July, on the same day as the Fed’s interest rate decision.
• AUDUSD continues to be buoyed above the 0.7900 handle, holding above it today for the fourth consecutive session.
• The resistance at 0.8000 remains key, while below, the support lies at 0.7835.

USDCAD:

• Spot 1.2544
• USDCAD extended recent declines on Friday, closing 0.7% lower at 1.2539, a fresh 14-month low, after economic data backed BOC Governor Poloz’s argument that inflation will shrug off some temporary weakness and move back toward his 2% target over the next year..
• 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 6.7591
• The PBOC strengthened its fixing to 6.7410 today, from 6.7415 per US dollar on Friday. Today’s fixing was the strongest in 9 months.
• USDCNH pared some of Friday’s decline, gaining as much as 0.1% to 6.7641 earlier.
• The 9-month low of 6.7234, established in early June, continues to act as a key support.

USDJPY:

• Spot 110.98
• The yen strengthened to a 5-week high against the US dollar, as USD weakness persists on concern a widening probe into possible ties between Russia and US President Trump’s election campaign may derail his growth agenda.
• Following Friday’s 1.1% fall, USDJPY extended its drop earlier today by 0.3% to 110.77.

GBPUSD:

• Spot 1.3015
• GBPUSD added 0.1% to 1.3015, extending Friday’s rebound. The pound has had its recent weakness outweighed by that of the dollar, causing GBPUSD to regain back above the 1.3000 handle.
• Following last week’s weaker-than-expected inflation data, thus reducing speculation of a rate-hike by the BOE, the risk remains to the downside for the currency pair, with a lower bound target of 1.2800 over the near-to-medium term.