Spot values at a glance:
Asian stocks climbed Tuesday as rising yields boost financial shares. The yuan tumbled to the lowest against the dollar in more than a year on further signs of a shift by China toward monetary expansion. Equities gained across the region, with the steepest advances in China and Hong Kong as Chinese assets came into focus after the government unveiled a package measures to boost domestic demand.
China Adds New Measures to Support Economy:
China unveiled a package of targeted policies on Monday to boost domestic demand as simmering trade tensions threaten to worsen the nation’s economic slowdown. From a tax cut aimed at fostering research spending to special bonds for infrastructure investment, the measures announced following a meeting of the State Council in Beijing are intended to form a more flexible response to “external uncertainties” than had been implied by budget tightening already in place for this year.
Fiscal policy should now be “more proactive” and better coordinated with financial policy, according to the statement, a signal that the finance ministry will step up its contribution to supporting growth alongside the central bank. The meeting reiterated language that China will strike a balance between easing and tightening and keep liquidity “reasonable and sufficient.” It also pledged to improve the transmission of monetary policy, a phrase the PBOC had dropped since a campaign to curb credit growth started in late 2016.
While there hasn’t been an official shift from the central bank’s “prudent and neutral” policy, steps announced in recent days indicate that officials are taking a supportive stance amid the trade dispute with the US. They include Monday’s record injection of funding for banks and the publishing of new guidelines for the asset management industry. The meeting also called for faster investment growth and steady financing to local investment projects. Policy makers stressed they’d refrain from using stimulus to flood the economy.
BOJ May Bring About Changes to Monetary Policy:
Japan’s debt market saw yields surge yesterday on media reports of possible changes to the nation’s ultra-loose monetary policy, spurring the central bank to offer to buy an unlimited amount of bonds. The yield on 10yr government securities soared as much as 6 basis points to 0.09%, its biggest increase in almost 2 years, pulling the yen higher and weighing on stocks.
A change to the BOJ’s ultra-loose monetary policy could affect the 269.5 trillion yen of overseas bonds owned by Japanese funds. Higher domestic yields could see some of this money come back home, especially as currency-hedging costs for dollar investments remain high. The BOJ’s negative interest-rate policy, followed by its yield-curve control program in September 2016, has prompted Japanese investors to seek returns from overseas debt.
“Japan has been an exporter of money for a long time and that has held global yields down to some extent,” said Martin Whetton, a senior rates strategist at Australia & New Zealand Banking Group Ltd. in Sydney. If yields in Japan were to go higher, “then obviously that has an impact,” he said.
Trump & Iran’s War of Words:
Iran has renewed threats to block the Strait since the US announced its plan to reimpose sanctions and cut shipments from OPEC’s third-largest producer to zero from about 2.5 million barrels a day now. The US president warned Iranian President Hassan Rouhani to “never, ever threaten the United States.” Trump’s tweet came hours after Rouhani warned the US against endangering Iranian oil exports and called for improved relations with neighbors, including rival Saudi Arabia.
Saudi Arabia and the United Arab Emirates, two of America’s closest friends in the Middle East and geopolitical adversaries of Iran, both have pipeline networks that bypass Hormuz. Iraq has one operational pipeline to a Turkish port on the Mediterranean Sea. All 4 countries are members of OPEC and depend on the Strait to export their oil.
The stepped-up US pressure comes about 3 months before US sanctions snap back against countries that continue importing Iranian oil. US officials reject suggestions that even close US allies will end up getting broad exemptions to sanctions, saying governments must show they are significantly cutting crude imports to avoid penalties. In that way, Trump’s tweet to Rouhani was also directed at reluctant US allies in Europe and Asia.
According to Bloomberg news, behind that effort, according to administration officials and analysts, is Trump’s desire to goad Iran, which has seen repeated public protests over corruption and slow economic growth, back to the negotiating table to hammer out a new, more comprehensive deal to replace the nuclear accord the US withdrew from in May.
Risk of No-Brexit Deal Rises:
British Foreign Secretary Jeremy Hunt said the UK will not “blink” in Brexit negotiations, as he warned the EU it risks forcing the country to crash out of the bloc with no deal.
On his first trip to Berlin since he replaced Boris Johnson earlier this month, Hunt appealed for more flexibility from his European counterparts as time for talks runs out. He said failure to strike a deal would poison British attitudes to Europe for a generation and cause major economic challenges for the UK.
Hunt’s visit marks the start of a week of intense diplomatic efforts by the UK government in an attempt to step up the pace of negotiations. Talks in Brussels have stalled as EU negotiators awaited a clear plan from the UK for its future relationship with the EU. Prime Minister Theresa May published her compromise proposals on July 12 but has been struggling to win support for them among members of her own government.
Singapore’s Core Inflation Accelerates:
Singapore’s core inflation accelerated to 1.7% in June, exceeding the median estimate in a Bloomberg survey for a second month, a report showed on Monday. “This is a further sign that improving growth is starting to filter through into price pressures, though it is still modest at this stage,” Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd wrote in a report. The central bank expects core inflation to average in the upper half of the 1% to 2% forecast range this year.
USDSGD remained supported above its 1.3600 handle and continues to stay within its range over the mast month. Further consolidation is expected between 1.3550 and 1.3750 over the near term. 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 last Friday, AUDUSD resumed its long-term downtrend this week and looks poised to retest the 0.7311 support again.
A break below 0.7300 could drive the pair lower to the 0.7160 support. Conversely, a climb back above 0.7600 signals a possible reversal.
USDCAD gained overnight on the back of USD strength, despite data from Canada showing that wholesales rose by 1.2% in May following April’s dismal 0.1% growth and surpassed the market expectation of 0.3%. The Canadian dollar was also weighed lower by weaker crude oil prices.
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.
Yuan fell 0.3% in both onshore and offshore trading after China’s central bank resumed a weaker fixing, lowering it by 0.44% to 6.7891 per dollar, its lowest in a year.
USDCNH rose by as much as 0.7% to 6.8446 earlier today, its highest level in more than a year, and bringing its gain over the past 2 weeks to more than 3%. The next key resistance resides around the 6.8500 handle, last tested during end-June last year.
According to UBS’ regional chief investment officer Kelvin Tay, the Chinese yuan can weaken past 7.000, relative to the USD, over the next couple of months because of slowing economy activity and trade.
USDJPY slipped below 111 yesterday, although the pair has since pared declines to 111.31 earlier today. The FX pair came under pressure Monday on the talk of a shift in the ultra-easy BOJ monetary policy and President Trump’s recent criticism of Fed rate hikes and a strong USD.
The uptrend since the start of the remains intact, although I break below 110 will change all that. The previous resistance of 111.40 comes into play again; any further recovery for the FX pair depends on whether 111.40 can be breached again.
GBPUSD erased previous session’s gains to decline back below 1.3100 earlier today, amid a broad USD recovery and another round of negative Brexit headlines. After ruling out a second Brexit referendum, UK PM Theresa May said that the government is stepping up preparations for a no-deal Brexit, although they are also working hard to avoid it.
The currency pair’s momentum remains to the downside; a retest of 1.3000 is likely over the near term.