June 4, 2018

Daily Observations:

Asian shares rose to their highest in two-and-a-half-weeks on Monday as strong US jobs data offset worries that tariff wars between the US and the rest of the world could retard global economic growth. The US dollar and then yen weakened, together with gold, as demand for safe haven assets retreated.

US Jobs Report Shines:

US hiring rose more than forecast in May, wages picked up and the unemployment rate matched the lowest in almost 5 decades, indicating the strong labor market will keep powering economic growth.

Payrolls increased 223,000 following a revised 159,000 gain, Labor Department figures showed Friday. The median estimate of analysts surveyed by Bloomberg called for 190,000 jobs. Average hourly earnings increased 2.7% from a year earlier, more than projected, while the jobless rate fell to 3.8% from 3.9% to match April 2000 as the lowest since 1969.

Stocks and Treasury yields rose Friday. The report reinforced expectations for Federal Reserve policy makers to raise interest rates when they meet June 12-13, and spurred investors to increase bets on 2 more hikes this year after that, rather than one. Steady hiring and lower taxes will bolster consumer spending, helping to support the projected rebound in US growth this quarter and continuing to trim the unemployment rate. Wage gains, while positive in the latest report, have yet to show a sustained acceleration.

Trade War Threat Looms:

US President Donald Trump is headed for a showdown with America’s allies at a Group of Seven summit this week in Quebec, with the European Union and Canada threatening retaliatory measures unless he reverses course on new steel and aluminum levies. China meanwhile is warning it will withdraw commitments it made on trade if the president carries out a separate threat to impose tariffs on the Asian country.

The White House appeared unfazed by the threats. Top economic adviser Larry Kudlow said Canadian Prime Minister Justin Trudeau was “overreacting” in response to the tariffs, and said the blame for any escalation lies with the U.S.’s trading partners. He said Trump is simply responding to decades of trade abuse.

The metal tariffs imposed on the European Union and Canada are the latest escalation by the US on the trade front that has roiled financial markets for months and prompted the IMF to warn of a trade war that could undermine the broadest global upswing in years.

Gold May Hit $1,400/Oz in 2019:

According to Bart Melek, global head of commodity strategy at TD Securities, gold is set to rebound in the final quarter of this year to average $1,375/Oz in the last 3 months of next year, and could touch a high of $1,400/Oz.

“As time moves on, there’ll be less and less reasons to get into the US dollar, which will likely reverse some of the flows,” said Melek, who’s among speakers at a precious metals conference in Singapore this week. “We do ultimately think that as we move into 2019, the US dollar will weaken, which is a very powerful fuel for the gold complex.”

The overall interest rate environment is expected to remain low as the Federal Reserve hikes another two or three times next year before ending its tightening cycle, said Melek. This, coupled with fully valued equities, geopolitical risks, and a downward trend in mine supply, will see increasing pressure to buy gold, he added.

Singapore Criticizes US & China for Risking Status Quo:

Singapore Defence Minister Ng Eng Hen criticized both the US and China for taking “unilateral actions,” lumping the 2 rivals together as nations challenging the current global order. In a speech to the annual IISS Shangri-La Dialogue security forum in Singapore, Ng said the world’s two-biggest economies were similarly using security considerations to justify their behavior – the US on trade and China for its military buildup in the disputed South China Sea.

The remarks reflect concern that smaller states, including open economies like Singapore, risk being caught in the wash of the US trade actions. Singapore has warned previously that countries should not be squeezed by competition between the US and a rising China, or forced to take sides.

It comes as G-7 finance chiefs issued a rare rebuke of a member nation, claiming US trade actions could undermine global economic confidence and threaten the effectiveness of the Western alliance.

China Debt Worries:

China’s fast-growing dollar-bond market is facing a fresh test as investors that counted on a type of credit-protection pledge seldom seen elsewhere find out just what those promises actually mean.

So-called keepwell provisions, disproportionately seen in the offshore Chinese debt market the past several years, are a sort of gentleman’s agreement – a commitment to maintain an issuer’s solvency which stops short of a payment guarantee from the parent company.

Now, 2 issuers of debt with keepwell provisions, China Energy Reserve & Chemicals Group Co. and CEFC Shanghai International Group Ltd. have defaulted on their dollar notes in May. They are among the region’s first defaults to carry such agreements, according to Goldman Sachs Group Inc., and investors are about to discover whether they provide the benefit that was promised.

A failed keepwell deed would be a further blow to China’s dollar bond market, where sentiment is already fragile with prices on junk debt plunging to a three-year low in May. Debt failures have spread after the government’s deleveraging campaign choked off some financing and the surge in Treasury yields raised cost of offshore funding, prompting some issuers to either shorten tenors or resort to floating-rate notes to pull in buyers.

Chinese issuers have total about $100 billion of notes outstanding with keepwell agreements, accounting for about 80 percent of such dollar issued bonds globally, according to data compiled by Bloomberg.

FX Updates:

USD/SGD:

Spot: 1.3373

USDSGD tested its 200-day moving average Monday and is currently trading near 2-week lows, after the US dollar pulled back following 7 straight weeks of gains. The currency pair has established a new trading range since breaking out of its downtrend channel a month ago. The bias continues to remain to the upside as long as the 1.3350 support holds.

AUD/USD

Spot: 0.7608

AUDUSD rose to a 1 month high Monday, on stronger than expected Australian inflation and retail sales data released earlier today. Tuesday’s RBA policy meeting will likely cap further gains. The longer downward trend remains, as indicated by the red line below.

USD/CAD:

Spot: 1.2936

USDCAD has settled between the range of 1.2750 and 1.3050 for most of the past month, and is expected to continue its consolidation as both central banks on either side of the border tussle it out in the rate hike race.

The Fed is expected to hike the rates at least 2 more times during the course of the year though the traders and the dollar bulls would like them rise it for 3 more times. On the other hand, the data from Canada has encouraged the BOC to be hawkish once again and this has led the CAD to strengthen all across the board as the BOC expressed happiness with the growth outlook in their last meeting. Over the nearer-term, crude oil weakness is expected to weigh down the Canadian dollar.

USD/CNH:

Spot: 6.4173

USDCNH broke above its key 6.4000 psychological resistance last week, and looks likely to test its 200-day moving average at 6.4621 in the near future. Onshore yuan declined to a 6-week low against a basket of currencies, as measured by Bloomberg’s replica of the CFETS RMB Index, extending its biggest weekly drop since March.

USD/JPY:

Spot: 109.67

USDJPY approached a 1-week high Monday. The yen was weaker against most major peers as demand for haven assets wilted following strong US jobs data last Friday. A recovery above 110 could pave the way to more upside for the FX pair, with the next resistance lying above at the 4-month high of 111.40.

GBP/USD:

Spot: 1.3370

Sterling is currently strengthening against most major currencies, and looks poised to gain for its fourth consecutive session. Despite its recent recovery, the outlook remains murky for the currency, due to the ongoing internal squabbles within the UK government and a lack of progress on the customs union debate.

Gains are likely to be capped around 1.3500, unless fresh positive developments take place, further pound weakness is expected.