July 27, 2017

Daily Observations:

The US dollar sank and Treasuries climbed after the Fed signalled last night that inflation remains persistently below its target even as the economy picks up steam. Most Asian equities followed US indices higher on optimism about corporate earnings. Crude oil and gold rallied overnight.

US:

• The US dollar sank after the Federal Reserve subtly acknowledged persistently sluggish inflation in its July decision, damping expectations for another interest rate increase this year. Officials said they would begin running off their $4.5 trillion balance sheet “relatively soon” and left their benchmark policy rate unchanged, as expected, as they assess progress toward their inflation goal.
• Last night’s statement highlighted that a period of weak inflation continues. “On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2%,” the statement said.
  
• To many, the new language suggested maybe the Fed is worried that the slowdown is more than transitory. Also, the central bank’s comment that it will start to shrink the balance sheet “relatively soon” was interpreted by some as a more open-ended expression than the “this year” that policy makers used in June.
• The US dollar plummeted and was the worst-performing G-10 currency of the day; the Bloomberg Dollar Spot Index gave up 0.6% overnight and a further 0.2% in Asia today. The Dollar Index dropped 0.3% earlier today to test overnight lows of 93.370; the key support level lies around 92.500.
• US Treasuries advanced following a more-dovish than expected FOMC statement; the benchmark 10yr yield pared a previous day’s gain to end 5bps lower at 2.29% in New York.
• According to Bloomberg pricing data, Fed fund futures are pricing in a 39% chance of an interest rate increase by year-end, down from 45% before the Fed’s statement.
• Major US equity benchmarks were relatively unchanged Wednesday, with the Dow Jones Industrial Average (+0.45%), S&P 500 Index (+0.03%), and Nasdaq Composite Index (+0.16%) all rising to close at records.
• The Senate rejected a simple repeal of Obamacare on Wednesday, still in the early stages of an unpredictable floor debate on health care amid significant doubts that Republicans can muster the 50 votes needed to pass any kind of bill.

UK:

• The UK economy last quarter expanded 0.3% quarter-on-quarter, in line with expectations and improving slightly from the prior quarter’s 0.2% pace.
• The modest expansion compounds what the Office for National Statistics called a “notable slowdown in the first half.” It suggests the economy’s resilience since the Brexit vote has weakened and it leaves the BOE’s divided policy makers with scant further evidence to justify an interest-rate increase next week.
• While services were the sole positive contributor to gross domestic product, the sector was mainly driven by retail and the film industry. Production and construction dragged on the economy, and agriculture had zero impact, the ONS said. At the same time, households are under pressure from rising prices and weak wage growth.

China:

• Chinese industrial profits in June surged 19.1% from a year ago, accelerating from the 16.7% pace a month earlier, and underscoring the economy’s momentum and helping the nation’s indebted companies grapple with their giant debt load.

Singapore:

• Industrial production in June rose 13.1% year-on-year, accelerating from May’s 4.4% gain and surpassing the median estimate of 8.5%.
• The better-than-expected manufacturing performance could prompt Singapore’s government to revise higher its projection for last quarter’s GDP, according to DBS Group Holdings Ltd.

Precious Metals:

• Spot gold rallied 1.3% to a 5-week high of $1,264.05/Oz to after the Fed left its policy rate unchanged and said it’s “monitoring inflation developments closely” and that inflation remains below target, fuelling speculation the central bank won’t rush to raise rates.
• Spot gold is currently testing a key downward multiyear trendline, as shown below, in play since 2011. An upward move above the $1,300/Oz handle should confirm the breakout of the aforementioned trendline and signal the start of a new multiyear upward trend.
  
• Silver for immediate delivery rallied as well, gaining 1.8% to $16.7309/Oz and clearing above the $16.50/Oz level in the process.

Oil

• Crude oil futures expiring in September extended its rally, gaining 1.8% to $48.75/bbl overnight as government data showed US crude stockpiles shrank to the lowest levels since the start of the year.
• Inventories declined by 7.2 million barrels last week to the lowest level since Jan 6, according to an Energy Information Administration report.
• Kuwait has agreed to trim sales for 2017, joining the UAE in promising to pump less and after Saudi Arabia called on OPEC producers to cut more.
• They key resistance lies closely above at the $49/bbl handle.

Cryptocurrencies:

• Companies that raise money through the sale of digital assets must adhere to federal securities laws, the Securities and Exchange Commission said Tuesday. Issuers must register the deals with the government unless they have a valid excuse, as should exchanges that offer trading of cryptocurrencies like bitcoin and ether, the regulator said.
• Bank of America Merrill Lynch is looking past the increase in bitcoin trading volume to caution against a surge in optimism surrounding the digital currency. “A key step for bitcoin would be for it to become pledgeable collateral,” the bank said in a note published Tuesday. “However, large inherent risks to digital tokens such as fraud, hacking, theft, new protocol adoption, limited acceptance, and that it is not legal tender many places in the world make it an unlikely development.”

USDSGD:

• Spot 1.3563
• USDSGD sank 0.5% to 1.3553, a 10-month low, following broad USD weakness today.
• The next key support lies at 1.3500, where the base of a double-top formation on the pair’s multiyear technical chart lies.
  

AUDUSD:

• Spot 0.8048
• AUDUSD broke above the psychological 0.8000 resistance for the first time since May 2015, rallying 1.7% to 0.8051 earlier.
• The next resistance target resides at 2-year high of 0.8164.

USDCAD:

• Spot 1.2436
• USDCAD declined to a 2-year low, falling 0.7% to 1.2414 earlier and breaching the previous support of 1.2461. The pair continues to be driven lower by USD weakness, as well rallying crude oil prices.

USDCNH:

• Spot 6.7317
• The PBOC strengthened its fixing by 0.33%, the most since Jun 28, to 6.7307 per US dollar earlier today.
• USDCNH slid 0.3% to 6.7306, and looks set to test the key support of 6.7234, following a selloff in the US dollar today.

USDJPY:

• Spot 110.81
• USDJPY retreated 0.9% to 110.80, and looks poised to retest the 110 handle again following a broad selloff in US dollars.

GBPUSD:

• Spot 1.3149
• GBPUSD rose 0.8% to a 10-month high of 1.3158 following last night’s dovish FOMC statement.
• The next resistance lies around 1.3450, however further upside for the currency pair may be muted given that investors are keeping an eye out on next week’s BOE policy decision.