Issue#: 526/2019

Spot values at a glance:

USD/SGD

USD/CNH

AUD/USD

USD/JPY

USD/CAD

GBP/USD

Daily Observations:

Asian stocks advanced Tuesday as investor focus returned to the US-China trade arena, while Treasury yields steadied after Monday’s gains. Earlier, the S&P 500 Index rose for a fifth straight session, though closed below the highs of the day. President Donald Trump threatened to raise tariffs on China again if President Xi Jinping doesn’t meet with him at the Group of 20 summit at month-end.

 

Trump to Raise Tariffs if Xi Refuses Meeting:

President Donald Trump threatened to raise tariffs on China again if President Xi Jinping doesn’t meet with him at the upcoming Group of 20 summit in Japan. Trump told reporters at the White House on Monday that he could impose tariffs of 25%, or “much higher than 25%” on $300 billion in Chinese goods. “We’ve never gotten 10 cents from China and now we’re getting a lot of money from China,” the president said.

Trump was asked in an interview with CNBC earlier in the day whether the additional tariffs would be enacted immediately if there’s no meeting at the summit later this month. “Yes, it would,” he answered. “I think he will go and I think we’re scheduled to have a meeting. I think he’ll go, and I have a great relationship with him. He’s actually an incredible guy, he’s a great man. He’s very strong, very smart, but he’s for China and I’m for the United States.”

Trade talks with China hit an impasse last month after the president accused Beijing of reneging on provisions of a tentative agreement. The two countries have since escalated their trade war. “China is going to make a deal because they’re going to have to make a deal,” Trump said Monday.

Trump again suggested that an eventual trade deal could involve Huawei Technologies Co. The Trump administration is campaigning to block the company from emerging 5G telecommunications networks around the world and has moved to cut off Huawei from US suppliers, citing national security concerns.

 

US Warn Hong Kong on Extradition Bill:

The US expressed “grave concern” over Hong Kong legislation that would for the first time allow extraditions to mainland China, raising pressure on Beijing as the city braced for a potentially historic showdown over the proposal.

The bill “could undermine Hong Kong’s autonomy and negatively impact the territory’s long-standing protections of human rights, fundamental freedoms and democratic values,” State Department spokeswoman Morgan Ortagus told reporters Monday in Washington. Opponents of the legislation on Sunday staged one of the largest protests since the former British colony’s return to China: Organizers said more than 1 million participants showed up, while police put the figure at 240,000.

Tensions are only heating up, with activists calling for strikes and vowing to surround the city’s Legislative Council on Wednesday, when lawmakers debate scores of proposed amendments. Hong Kong’s Beijing-backed leader, Carrie Lam, defended the bill in a 45-minute news briefing Monday, saying it was necessary to prevent the city from becoming a “haven” for fugitives and vowing to press ahead with its passage. China endorsed her government’s efforts later in the day.

The extradition bill could potentially affect any of the city’s 7.5 million residents, including employees of the almost 1,400 multinational companies with regional headquarters there. The legislation would allow Hong Kong to enter one-time extradition agreements with jurisdictions where it lacks formal agreements, including mainland China, which often hands down lengthy prison terms to non-violent criminals such as activists and drug offenders.

The extradition bill has been criticized by Western governments and international business organizations as a threat to the “one country, two systems” framework credited with maintaining Hong Kong’s status as a global financial center. It’s one of several moves under President Xi Jinping that have raised concern about Hong Kong’s autonomous structure, which guarantees free speech, capitalist markets and British common law.

 

Australian Business Confidence Jumps:

Australian business confidence surged after Prime Minister Scott Morrison’s shock election win, while conditions again deteriorated, providing further grist to the central bank’s decision to cut interest rates.

Sentiment jumped 7 points in May from 0 the previous month, the biggest gain since the center-right government came to power almost 6 years ago, National Australia Bank Ltd.’s survey showed Tuesday. The conditions index, measuring hiring, sales and profits, slumped to 1 from 3.

Reserve Bank Governor Philip Lowe cut rates last week for the first time since he took the helm in 2016 to encourage firms to hire and invest in an economy that’s sharply decelerated in the past nine months. Confidence was bolstered by Morrison’s come-from-behind win on May 18, which was bracketed by the NAB survey that ran from the 14th-24th.

Australia’s economy expanded in the first 3 months of the year at the slowest annual pace in a decade and inflation barely registered in the period. Growth is almost entirely supported by government spending currently and the RBA is urging Morrison and his ministers to address policies that will boost productivity and living standards.

 

Trump Directs Attack on Fed Again:

President Donald Trump renewed his attack on the Federal Reserve, complaining it doesn’t “listen” to him and contrasting that lack of obedience with the control that China’s leader wields over its central bank. “The head of the Fed in China is President Xi,” Trump told CNBC television in a telephone interview Monday. “He can do whatever he wants. They devalue. They loosen” monetary policy to help offset the burden of tariffs, he said.

Trump’s broadside comes a week before the Fed meets in Washington, when it’s expected to discuss whether an interest-rate cut is needed to help offset an economic slowdown caused by his trade war. His latest assault on the US central bank returned to his argument that it should help him out with China, a sensitive topic among US allies who worry about monetary policy being used for foreign policy goals.

US Treasury Secretary Steven Mnuchin, speaking in an interview Saturday in Fukuoka, Japan, where he was attending a Group of 20 meeting, said the proposal does not signal a preference for a weaker dollar. Refreshing other familiar themes of frustration, Trump said the Fed “certainly didn’t listen to me because they made a big mistake. They raised interest rates far too fast,” and he went on to chide them for hiking “the day before a bond issue goes out so we have to pay more money.”

 

China Imports Dropped in May:

China’s imports tumbled in May and a surprise rise in exports wasn’t enough to dispel concerns that the economic dispute with the US will intensify and damage the global economy. Imports declined by 8.5% in May from a year earlier, according to the customs administration, more than double the forecast drop. While exports rose 1.1% compared to an expected decline, shipments to the US fell for a second month.

The fall in imports underscores the weakness of the domestic economy while the uptick in exports may well prove temporary, as it’s likely driven by manufacturers front-loading shipments ahead of threatened new US tariffs. That’s worrying for the global economy, and with no sign of any breakthrough so far between the US and China, it only increases the importance of a possible meeting between Presidents Donald Trump and Xi Jinping at the G-20 leaders summit in Osaka later this month.

 

Fed Easing Still Expected Despite US-Mexico Deal:

Bond traders expect that the Fed will start slashing interest rates within months and the trade deal between the US and Mexico has barely put a dent in that view. The August fed funds futures contract shows traders are pricing in a central-bank rate of 2.15% after policy makers’ July meeting.

That’s 3 basis points higher than Friday’s closing level, before US President Donald Trump announced an accord with Mexico. But it’s still 22 basis points below the current effective fed funds rate, signaling traders see almost a 90% chance of a quarter-point reduction by the end of July. The January contract, meanwhile, shows traders are betting on more than 60 basis points of easing by the time 2019 is over.

Friday’s weaker-than-expected US jobs report added fuel to the idea that the economy is struggling enough to warrant fresh stimulus from the Fed. And while the tension between Mexico and America has eased, concern about the trade fight between the US and China continues to weigh on investor confidence. All that means that traders are still betting on easing sooner rather than later, with some speculating that the first move could be a 50-basis-point cut.

 

Sources: Bloomberg

    

FX Updates:

USD/SGD:

Spot: 1.3656

USDSGD continues to hold above the 1.3614 support, despite giving up 0.1% earlier today. The Singapore dollar on Monday retreated from a one-month high against the USD following Trump’s decision to suspend tariffs on Mexico. A retest of 1.3614 is expected this week

 

AUD/USD

Spot: 0.6961

AUDUSD slipped further from the 0.7000 handle earlier today, after Trump kept the door open to boost tariffs on China, Australia’s largest trading partner. In addition, the RBA is expected to continue to adopt a dovish forward guidance at its next meeting on Jul 2. The longer-term trend continues to point to the downside.  The next support bellows lies at 0.6828.

 

USD/CAD:

Spot: 1.3264

USDCAD continued to trade near a 3-month low, around its 200-day moving average of 1.3272, after the Canadian dollar’s recent strength following a US-Mexico deal. A break below 1.3200 is likely to trigger a swift move lower to the 1.3069 support. The major long-term trend remains to the upside, for now, until the 1.3069 mark gets breached.

 

USD/CNH:

Spot: 6.9298

Since soaring earlier last month, USDCNH has since found a consolidation range between 6.9000 and 6.9500 over the past 3 weeks. The pair retreated from the top end of its range today, following a stronger-than-expected yuan fixing by the PBOC earlier today – a move that analysts say indicate officials are intent on keeping the yuan stable and have no desire to see weaken further.

 

USD/JPY:

Spot: 108.62

USDJPY was little changed earlier today, maintaining Monday’s rebound from the 108 support amid renewed risk-on appetite in global markets. According to a Bloomberg report, yen bulls are keeping a close eye on the 2% level in 10yr Treasury yields, the level which may stem the flow of yen abroad.

Japanese investors have been pouring into overseas investments in recent years, thanks to the paltry yields available at home, boosting demand for foreign currencies at the expense of the yen. Together with the surge in offshore acquisitions by Japanese corporates, outflows have helped keep pressure on the currency haven, limiting its strength during periods of market turbulence.

 

GBP/USD:

Spot: 1.2683

GBPUSD seemed to have found footing at 1.2600, as the pair continues to hold above it over the past 2 weeks. However, the pound started this week off weaker following dismal manufacturing production numbers, which contracted by the most in about 17 years. Meanwhile GDP also slumped, contracting for a second month and registering its worst reading in over 3 years. Adding that to the continuing Brexit uncertainty, the pound is expected to remain weak for the foreseeable future. A retest of 1.2600 is likely; below which, the next support resides at the January low of 1.2441.

   

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