June 12, 2018

Daily Observations:

The dollar jumped to a 3-week high on Tuesday while stock markets in Asia were mixed as an historic US-North Korea summit got underway in Singapore, raising some hopes it could pave the way to ending a nuclear stand-off on the Korean peninsula.

Trump-Kim Summit:

Donald Trump plans to shake hands and have lunch with North Korean leader Kim Jong Un, kicking off a historic summit on Tuesday between 2 adversaries that only last year seemed on the brink of nuclear war. The summit represents a major gamble for each leader, with the elevated risk and potential reward the US president favors. The meeting will be monitored, and dissected, around the globe for a sense of whether one of the world’s greatest national security threats, Kim’s nuclear arsenal, can be defused.

The US plans to keep sanctions in place until North Korea eliminates its nuclear weapons capability, yet is prepared to offer “unique” guarantees to ease the regime’s security concerns, Secretary of State Mike Pompeo said ahead of the summit. The top US diplomat emphasized that complete, verifiable, irreversible denuclearization “is the only outcome that the United States will accept” from North Korea, sending a stern message to Pyongyang before Tuesday’s meeting in Singapore.

Low Expectations:

For diplomats and analysts familiar with Washington’s decades of pressuring a reclusive dictatorship to abandon its nuclear program, expectations of Tuesday’s meeting are low. Any outcome that avoids a return to the “fire and fury” threats of last year, and neither betrays allies nor prematurely eases sanctions, would be seen as a broad success.

For Kim, the meeting will already be a unique achievement. His father and grandfather before him sought one-on-one summits with US presidents, but neither succeeded. The summit will offer him a measure of legitimacy and international acceptance that will prove invaluable at home. The bar set by Trump and his team is much higher: to get the “complete, verifiable and irreversible dismantlement” that has eluded previous administrations, with a deal they’d view as tougher than the 2015 Joint Comprehensive Plan of Action with Iran. Trump withdrew from that multinational deal last month, arguing it was unacceptably weak.

Fed, ECB Policy Decisions This Week:

Meetings of the Federal Reserve and the European Central Bank this week are likely to show a continued, gradual move away from the policy approach they adopted to contain the trauma of the global financial crisis from 2010 to 2017, Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, sayid. Yet the two institutions are making this shift at different speeds, and that difference could become more pronounced, raising interesting questions for markets.

El-Erian expects the Fed to increase interest rates by a quarter of a percentage point, keep open the possibility that the next hike could come as early as September (rather than December), maintain the baseline of a total of 3 increases for 2018, and suggest that the balance of risks is tilted toward 4 boosts. Policy makers will also reaffirm the plan for reducing the balance sheet and refrain from major changes to the dot plot, El-Erian says.

When it meets June 14, the ECB will attempt to paint a positive picture of the euro-zone economy. But because the economic, financial and political context contains greater uncertainty, the central bank is unlikely to deliver the policy announcement that some in the markets have already been inclined to price, El-Erian noted. Specifically, rather than end its asset purchase program in September, the ECB will extend it for at least 3 months and keep open the possibility of further extensions. This, in turn, would push back expectations for the beginning of the rate-hiking cycle.

US Inflation Accelerates:

American consumer prices accelerated in May and costs paid to producers picked up, signs of a steady pickup of inflation that’s consistent with the Federal Reserve’s gradual approach to raising interest rates, government figures are projected to show this week.

According to Bloomberg news, rising gasoline prices probably helped propel the consumer-price index up 2.7% in May from a year ago, the biggest advance since February 2017, the Labor Department is forecast to report on Tuesday. The core CPI is projected to climb 2.2% , the most in more than a year. Data on Wednesday may show prices paid to producers increased 2.8% from a year ago.

The rise in petroleum prices, which has pushed up gasoline, also risks driving up the costs of services such as airfares. And while they don’t always filter down to the consumer, prices charged by producers have also picked up as they contend with tariffs on aluminum and steel, the threat of additional charges on China that’s swung commodity markets, labor shortages that are boosting wages, and logistics constraints.

FX Updates:

USD/SGD:

Spot: 1.3361

USDSGD continues to be buoyed above its 1.3300 support level, and is threatening to regain above its 200-day moving average of 1.3358. The pair looks likely to maintain between 1.3300 and 1.3500 for the time being, with a slight bias to the upside. A more-hawkish-than-expected Fed decision this Wednesday is likely to push the currency pair back above 1.3400.

AUD/USD

Spot: 0.7607

From a longer-term perspective, AUDUSD remains biased to the downside following a retreat back to the 0.7600 handle last Friday. A decline back below 0.7600 should pave the way for a swifter retreat to 0.7500.

USD/CAD:

Spot: 1.2992

USDCAD retreated below 1.3000 overnight but fell short of reaching its 2-month high of 1.3067. With the war of words between US President Trump and Canadian Prime Minister Trudeau raging on following events over the weekend, more weakness could be in store for the Canadian dollar.

USD/CNH:

Spot: 6.4006

USDCNH continues to fluctuate around the 6.4000 handle after the PBOC today set its daily reference rate at its weakest level in a week amid dollar strength. Following the breach of the pair’s 8.3800 last month, the bias remains to the upside with the 200-day moving average of 6.4562 as the next target.

USD/JPY:

Spot: 110.22

USDJPY rose to its highest in more than 2 weeks, after the yen weakened as safe haven demand declined following the commencement of the Trump-Kim meeting earlier today. However, large moves are not expected with both the Fed and BOJ releasing monetary policy decisions this week

GBP/USD:

Spot: 1.3363

GBPUSD remained near its 1-week low following softer-than-expected UK economic data yesterday. Weaker than anticipated retail sales data, due at the end of the week, is likely to drive the currency pair back towards its year-to-date low of 1.3205.