Issue#: 465/2018

Spot values at a glance:







Daily Observations:

Asian stocks dropped alongside US equity futures after President Donald Trump threatened to slap tariffs on more Chinese goods. Safe haven assets such as gold, the Japanese yen and Treasuries climbed. The Australian dollar tumbled as commodity currencies weakened amid renewed concern over trade protectionism.


US-China Trade Spat Intensifies:

President Donald Trump has directed the US Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10%. Trump said he was taking action because China “has no intention of changing its unfair practices related to the acquisition of American intellectual property and technology.” US Secretary of State Mike Pompeo amplified Trump’s tough line on trade in a speech Monday, saying US action was long overdue and calling Chinese appeals for greater economic openness “a joke.”

The comments come as Chinese President Xi Jinping appears poised to match Trump blow for blow in tariffs. In his announcement of levies on Chinese goods on Friday, Trump had vowed additional duties if China retaliated, which Beijing immediately did. Analysts increasingly expect the confrontation to be a war of attrition.


Merkel’s Political Future on the Ropes:

German Chancellor Angela Merkel accepted a two-week deadline to forge a European agreement on tougher migration policy, a concession to her Bavarian coalition partner, Interior Minister Horst Seehofer, and eases an immediate standoff without removing the threat of further government tension down the road.

Seehofer will give the chancellor until the end of the month to strike a Europe-wide agreement over refugees before he takes unilateral action to reject certain migrants at the German border, which Merkel has opposed, said a person familiar with the situation, Bloomberg news reported.

Seehofer’s ultimatum has become one of the biggest challenges to Merkel’s authority since she took power nearly 13 years ago. The deadline shows how emboldened the chancellor’s Bavarian ally feels as Hungary, Italy and Austria adopt hard-line stances on protecting national borders. Even with a sharp decline in the numbers crossing to Europe over the Mediterranean, migration has surged to the top of the political agenda, with the proliferation of unilateral measures fraying the bonds of EU unity.

Failure to reach a deal that can be presented as a breakthrough at the European level could precipitate a full-blown crisis in Germany that might topple Merkel after almost 13 years as chancellor. Her demise would likely further bolster authoritarian governments in Eastern Europe, undermine the new Spanish government’s humanitarian stance on migration and put at risk Macron’s plans for euro-area reform.


OPEC in the Spotlight:

OPEC is discussing a relatively modest production increase before its meeting in Vienna this week, an attempt to bridge the gap between Russia’s push for a big boost and Iran’s insistence that no change is needed. A compromise could mean the resulting supply boost is smaller than oil traders had anticipated. Members OPEC are discussing an agreement that delivers 300,000 to 600,000 barrels a day of additional supply to global markets over the next few months, according to people briefed on the talks. That would be smaller than the 1.5 million-barrel-a-day quota increase that Russia has proposed.

The push by some OPEC members to boost production reflects both internal and external pressures. Within the group, Venezuela’s oil output has collapsed to the lowest since the 1950s due to industry mismanagement, and Iran’s petroleum exports are subject to renewed US sanctions. These twin crises could remove 1.5 million barrels a day from the market by next year, while also giving those two nations an incentive to block any efforts to fill the gap.

From outside, Trump is attacking the cartel on Twitter for artificially inflating prices and lobbying hard behind the scenes for a significant production increase. Russia, by far the largest non-member to join OPEC’s cuts agreement, has said it would be happy with lower crude prices and appears keen to start up new fields.


Bitcoin Suffers from Shortcomings, BIS Says:

The Bank for International Settlements just told the cryptocurrency world it’s not ready for prime time and as far as mainstream financial services go, may never be. In a 24-page article released Sunday as part of its annual economic report, the BIS said Bitcoin and its ilk suffered from “a range of shortcomings” that would prevent cryptocurrencies from ever fulfilling the lofty expectations that prompted an explosion of interest and investment in the would-be asset class.

The 88-year-old institution, based in Basel, Switzerland, analyzed what it would take for the blockchain software that underpins Bitcoin to process the digital retail transactions currently handled by national payment systems. As ledgers swell, the researchers found, they would eventually overwhelm everything from individual smartphones to servers. “The associated communication volumes could bring the Internet to a halt,” the report said.


Larry Summers Warns of Possible Recession:

Former US Treasury Secretary Lawrence Summers warned that developed countries are badly equipped for another recession, both economically and politically, and that central banks should be wary of raising interest rates just to stop inflation from running a little hot. “The consequences of another economic downturn dwarf and massively exceed any adverse consequences associated with inflation pushing a bit above 2%,” Summers said Monday at a European Central Bank conference in Sintra, Portugal. His comments echoed sentiments earlier on Monday by billionaire hedge fund manager Paul Tudor Jones. “The next recession’s really frightening, because we won’t have any stabilizers,” Jones said on Yahoo Finance. “Monetary policy will exhaust really quickly,” while fiscal stimulus won’t be available, he said.


RBA Minutes Indicate Positive Growth:

The RBA June meeting minutes indicated that “recent data is consistent with forecast acceleration in GDP growth to above 3% percent”, but warned that protectionist policies, political uncertainty in Italy and EM instability are a downside risk to the global outlook.

The RBA expects 1Q growth of at least 2.75% at the meeting, held a day before the release of GDP data that showed 3.1% annual expansion. The central bank indicated infrastructure investment is likely to continue to support growth for “some time” and that wage pressures building in US and Japan were expected to lead to a lift in inflation.

According to Bloomberg news, the RBA is confident the economy is headed in the right direction, albeit at a slower pace than it would like. Governor Philip Lowe’s determination to avoid adding stimulus means he’s left to cheer from the sidelines, betting strong business confidence will keep boosting investment and hiring, with unemployment “gradually” moving lower and inflation higher. Traders see little chance of a rate increase before late next year.



FX Updates:


Spot: 1.3513

USDSGD soared to a 6-month high Monday after the greenback strengthened amid the backdrop of more Fed rate hikes and an intensifying trade war between the US and China. With Trump seeking to expand the value of Chinese products subjected to tariffs, the bias for USDSGD remains to the upside, with the next resistance target lying around the 1.3700 handle.



Spot: 0.7389

AUDUSD dipped below 0.7400 today, falling to a 1-year low of 0.7387, as risk appetite soured on renewed threats of a US-China trade war. 0.7400 is a key support level; a break below is likely to lead to a revisit of the 0.7160 region, last tested in early Jan 2017.



Spot: 1.3238

USDCAD rose to its highest in almost a year earlier, driven by the strengthening greenback, taking out its previous high at 1.3125. The pair rose to 1.3241; the Canadian dollar was among the worst performers as commodity currencies underperformed against the USD amid higher US yields and trade tensions.

From a technical point of view, the pair has broken above its long term wedge pattern; the bias is to the upside with 1.3500 a realistic target over the coming weeks.



Spot: 6.4612

USDCNH gained above its 200-day moving average for the first time in more than a year, as China’s trade dispute with the US escalated, prompting speculation the PBOC may weaken the yuan to support its economy.



Spot: 109.67

USDJPY declined to 1-week lows earlier, underpinned by haven demand as investors snapped up safety assets such as the Japanese yen. The 2-month low at 108.11 represents the pair’s next support. Further escalation in trade tensions is likely to drive the currency pair to said support.



Spot: 1.3210

GBPUSD approached its year-to-date low, in anticipation of the BOE’s policy meeting this Thursday and another expected parliamentary confrontation of the government’s Brexit plans.

Prime Minister Theresa May’s Brexit plans face the prospect of rejection by parliament’s upper chamber later on Monday, setting the stage for a high-stakes confrontation with rebel lawmakers later in the week.

A break below 1.3200 will likely confirm the continuation of GBPUSD’s longer-termed downtrend.



Sources: Bloomberg

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UEN: 201419754M

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