July 5, 2017

Daily Observations:

Geopolitical concerns loomed over some financial markets for a second day, as North Korea’s ICBM launch yesterday sent investors seeking out haven assets such as the yen and gold. Stocks in Japan and Australia fell, though equity markets elsewhere in Asia staged a turnaround and moved higher.

Geopolitics:

• The UN Security Council is poised to hold an emergency hearing on Wednesday after North Korea claimed it successfully test-fired an intercontinental ballistic missile. The revelations are being seen as a move by Kim Jong Un to exploit recent divisions between the US and China ahead of President Donald Trump and President Xi Jinping’s meeting at the G-20 this week.
• Qatari Foreign Minister Mohammed Al Thani said the 13 demands made by the Saudi-led alliance that cut off economic and diplomatic ties with the emirate a month ago are “neither reasonable nor actionable” ahead of the July 5 compliance deadline. Al Thani added that he wouldn’t make the nation’s response public — though he had briefed his German counterpart on their contents. German Foreign Minister Sigmar Gabriel — who had overseen talks between the Qatar and the Saudi-led bloc — said he expects the response to be rejected.

US:

• Minutes of the Fed’s June 13-14 meeting will be released later today. Investors will keep an eye out for clues about whether they’ll begin reducing their balance sheet before another rate hike.
• The Fed lifted rates in June, signalled one more hike in 2017 in updated projections and spelled out how it would begin gradually unwinding its bond portfolio this year. Fed Chair Janet Yellen had said the process could begin “relatively soon”, however she has left the precise timing and sequencing a mystery.
• Economic data have shown little change since the Fed’s last meeting, so the minutes should offer a current glimpse into how officials view the backdrop as they weigh policy decisions. They’ll also kick off a busy few days for Fed watchers, with its Monetary Policy Report due Friday and Yellen’s semi-annual testimony to Congress beginning on July 12.
• Market moves were muted overnight with the US stock market closed due to a national holiday.
• The US dollar was little changed, although selling resumed this morning during Asian trade, with the Bloomberg Dollar Spot Index shedding 0.2% this morning.
• The benchmark 10yr yield resumed trading this morning, and fell by 3bps to a low of 2.32%.

Canada:

• The Markit manufacturing PMI for June slipped to 54.7, from 57.7 in May.
• Bank of Canada Governor Stephen Poloz said inflation should be “well into an uptrend” in the first half of 2018 as the output gap in Canada’s economy closes.

UK:

• Bank of England official Michael Saunders said UK households should prepare for tighter policy “at some point” in an interview with the Guardian. He added if rates go up, it will be in the context of the economy “doing okay and unemployment being low and probably falling”.

Australia:

• Australia’s central bank kept its benchmark interest rate unchanged at 1.5% yesterday as it waits to see if wages will respond to a burst of hiring. Bucking a trend in joining his global counterparts in talking up policy tightening, Governor Philip Lowe instead reiterated concerns that record household debt and weak wage growth leave consumption vulnerable.

China:

• The Caixin China PMI Composite in June slipped to 51.1, from 51.6 in May. The PMI Services index fell as well, from 52.8 previously to 51.6 last month.

Singapore:

• The Nikkei Singapore PMI for June slipped to 50.7, from 51.4 in May.

Precious Metals:

• Spot gold rebounded from a 7-week low to advance by as much as 0.3% to $1,228.92/Oz earlier today as fresh geopolitical concerns sent investors seeking out haven assets. Demand in has been capped though with some investors still awaiting tonight’s FOMC minutes.
• On a longer-term basis, following a break below the 200-day moving average earlier this week, the next support level to be tested lies around the $1,200/Oz psychological handle.
• Gold will probably trade in a range of $1,200 to $1,300 an ounce in the short-term as the metal tracks U.S. real interest rates, according to UBS Group AG’s wealth management unit.
• Silver for immediate delivery rebounded as well, climbing 0.7% to $16.2257/Oz. However, following its break below the $16.25/Oz level earlier this week, the metal has completed a technical breakout to the downside from the multiyear wedge pattern formed since end 2015; momentum stays firmly to the downside.
• Global outflows from ETFs that invest in miners of gold, silver and platinum hit $4.4 billion in the second quarter of this year – the largest on record, according to data from HIS Markit. The sum is the biggest since the financial crisis and dwarfs the second largest on record – $800 million in 4Q 2015.

Oil

• Crude oil futures expiring in August fell slightly earlier today, by 0.7% to $46.74/bbl, and looks set to end its 8-day winning streak.
• Russia was said to oppose any proposal to deepen OPEC-led production cuts, and instead wants to continue with the current deal. Government officials had said any further supply curbs would send the wrong message to the market.
• US crude inventories is forecast to drop by 2.5 million barrels last week, A Bloomberg survey showed before a government report on Thursday.

USDSGD:

• Spot 1.3805
• USDSGD declined back to the 1.3800 handle following 2 days of gains. The pair looks set to consolidate around current levels ahead of tonight’s release of the Fed’s June meeting minutes.
• On a longer-term basis, momentum continues to remain biased to the downside. The support remains at 1.3700.

AUDUSD:

• Spot 0.7620
• AUDUSD rebounded off its 0.7600 handle, following a 0.6% drop in its prior session on a less hawkish-than-expected tone from the RBA yesterday. The pair rebounded 0.2% to 0.7624 earlier today.
• The top boundary of the pair’s range since April 2016 lies around 0.7750 – a key resistance point.

USDCAD:

• Spot 1.2936
• USDCAD failed to recover above the 1.3000 handle, extending its recent drop instead by 0.6% to 1.2913 following more hawkish comments more BOC Governor Poloz.
• The next support comes in around 1.2800.

USDCNH:

• Spot 6.7748
• The PBOC weakened its fixing rate by 0.05% to 6.7922 per US dollar earlier today.
• USDCNH declined back below the 6.8000 handle, falling 0.2% to 6.7903.

USDJPY:

• Spot 112.98
• The yen rose for a second day as Tuesday’s missile test by North Korea prompted responses from the US and its allies, fuelling demand for safer assets. USDJPY fell 0.3% back below 113 to 112.83 earlier.

GBPUSD:

• Spot 1.2936
• GBPUSD was little changed, erasing an initial 0.2% decline. The pair seems to have found some footing above the 1.2900 handle.