June 20, 2017

Daily Observations:

Most Asian equities extended a global advance as technology shares continued to rebound. Gold and Treasuries declined amid hawkish comments from Fed official William Dudley, while the US dollar strengthened. Crude oil slid overnight to a crucial support level.

US:

• The Fed’s New York President William Dudley aligned himself with Chair Janet Yellen in declaring his expectation that a tight labour market will eventually trigger a rebound in inflation data that has been unexpectedly weak in recent months. He commented that the economy is pretty close to full employment, and that although inflation is a little lower than preferred, it should get back to 2% if the labor market continues to tighten.
• Chicago Fed President Charles Evans said Federal Reserve officials need to show a commitment to reaching their goal on inflation, which has generally been running below target since the financial crisis. He stressed that the central bank has to assure the public that given the new low-inflation environment, they aren’t overly conservative central bankers who see the inflation target as a ceiling.
• The US dollar mainly strengthened last night, following hawkish comments from the usually-dovish William Dudley. The Bloomberg Dollar Spot Index added 0.4% last night.
• Treasuries mainly dipped, as yields gained; the benchmark 10yr Treasury yield rose 4bps to 2.19%.
• US tech shares led gains that sent benchmark equity indices to fresh records. The Nasdaq Composite rallied 1.4%, while the S&P 500 Index advanced 0.8% to a record high.
• The rebound in tech shares exemplified the risk-on mood among investors as the week began, with Apple Inc. leading a rebound in some of the year’s highest fliers, though the tech indices remain roughly 2% below record levels reached earlier this month.

UK:

• BOE policy maker Kristin Forbes commented that the central bank has been underestimating inflationary pressures and that rising domestic cost pressure suggests “there’s a cost to waiting” to raise rates. Forbes, who leaves the Monetary Policy Committee at the end of this month, has voted for higher interest rates at each of the past 3 meetings, arguing that inflation is being changed fundamentally by the pound’s depreciation since the Brexit vote.

China:

• MSCI is set to announce early Wednesday morning (HKT) whether China’s domestic stocks have won inclusion into its benchmark indices.
• Investors are wagering that that will happen, with the Morgan Stanley A Share Fund soaring to its highest level since Dec 2015. Only 169 mainland-listed firms will be considered, down from 448 under a past proposal. Under the latest consideration, the weighting of yuan-denominated A shares would be just 0.5% of the gauge, half of the previous suggested level.
  

India:

• India, where inflation was running at more than 11% 4 years ago, has turned things around. Gains in the cost of living have slipped to a record low 2.2%. Economists say cyclical or temporary issues like a stronger currency and weaker domestic demand are helping. So too are structural factors such as better food management by Prime Minister Modi’s government.
  

Australia:

• According to the RBA’s minutes of this month’s policy meeting, while property had been “rising briskly” in Sydney and Melbourne, there were also some signs that price pressures were beginning to ease. Similarly, while employment growth had strengthened in recent months, growth in hours worked had declined. The RBA also reiterated growth in housing debt had outpaced growth in household incomes and noted measures by the banking regulator designed to cool lending “were yet to have their full effect”.
• The long-term ratings of Australia’s 4 major banks – ANZ, CBA, NAB and Westpac, were downgraded to Aa3 from Aa2 by Moody’s due to elevated risks in the household sector which would in turn heighten the sensitivity of banks’ credit profiles to an adverse shock.

Precious Metals:

• Spot gold slid extended its recent decline, falling 0.7% to $1,242.95/Oz earlier today as investors weighed hawkish comments from Fed official Dudley.
• The precious metal has fallen below the $1,260/Oz handle, which could be a worrying sign for gold bulls. The next region of support lies at the $1,240/Oz support, where the 200-day moving average resides as well. Further risk-on sentiment could drive the yellow metal further until the $1,215/Oz support.
• Silver for immediate delivery tumbled 1.1% to a fresh 3-week low, 1.1% lower to $16.4830/Oz.

Oil

• Crude oil futures expiring in July earlier pared some of its 1.2% overnight decline to $44.20/bbl, as investors weigh a forecast decline in US crude stockpiles against the revival in output from Libya.
• US inventories probably shrank by 1.2 million barrels last week, according to a Bloomberg survey before Energy Information Administration due later today.
• Libya is pumping the most oil in 4 years after a deal with Wintershall AG enable at least 2 fields to resume production.
• The low last month of $44.13/bbl remains as the next level of support.

USDSGD:

• Spot 1.3866
• USDSGD gained 0.4% to 1.3880, a fresh 3-week high following USD strength today.
• The upcoming resistant level of 1.3900 looks set to be tested soon.

AUDUSD:

• Spot 0.7590
• AUDUSD retreated 0.4% to 0.7585, following a stronger US dollar today.
• The pair has tested 0.7585 twice in 2 days; a break below may lead to further downside with the next short-term support coming in at 0.7568.

USDCAD:

• Spot 1.3222
• USDCAD was little changed earlier, gaining back above the 1.3200 after falling below it overnight.
• Loonie strength from due to recent hawkish tones from central bank officials have been offset my crude oil weakness.
• The pair is currently supported around the 1.3200 handle, but a convincing break below it may drive the pair lower to the next support at 1.3000.

USDCNH:

• Spot 6.8322
• The PBOC earlier weakened its fixing rate by 0.18% to 6.8096 per US dollar, its weakest fixing this month.
• USDCNH advanced by as much as 0.2% to 6.8347 today. Further upside may be capped, with a key resistance level lying at 6.8450.

USDJPY:

• Spot 111.69
• USDJPY soared to a 3-week high, rising 0.7% to 111.78 earlier, following hawkish comments from Fed officials which bolstered the US dollar.
• The key level of 112 is set to be tested but may be a tough nut to crack as better US inflation data is needed first to support the Fed’s bullish outlook and interest rate path.

GBPUSD:

• Spot 1.2735
• GBPUSD shed 0.6% earlier, reaching an intraday low of 1.2724 and paring most of its gains over the past 2 sessions.
• Another retesting of its low last week looks likely, with the sterling likely to be pressured amid uncertainty surrounding Brexit talks which kicked off yesterday.