June 8, 2018

Daily Observations:

Asian stocks traded lower Friday after a risk-off session in global markets where technology stocks retreated and Brazilian assets slumped. Treasury yields recovered some of Thursday’s decline. US benchmarks closed mixed overnight, with the Nasdaq 100 falling the most in 3 weeks. Traders had flocked to Treasuries, igniting gains that at one point pushed the 10yr yield down 9 basis points in a matter of minutes. The dollar fluctuated and the yen held gains.

Bernanke Warns of Slowdown:

US economic growth could face a challenging slowdown as the Trump Administration’s powerful fiscal stimulus fades after 2 years, according to former Federal Reserve Chairman Ben Bernanke. Bernanke said the $1.5 trillion in personal and corporate tax cuts and a $300 billion increase in federal spending signed by President Donald Trump “makes the Fed’s job more difficult all around” because it’s coming at a time of very low US unemployment.

The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff,” Bernanke said, referring to the hapless character in the Road Runner cartoon series.

Euro Exports Fall:

Euro-area exports fell for the first time in 5 years at the start of 2018, dragging on economic growth, which slowed sharply in the period. Updated first-quarter GDP data showed that government spending stagnated in the three months through March, while exports fell 0.4% and net trade proved a drag. The economy expanded 0.4%, down from 0.7% at the end of 2017, in line with the initial reading from the Eurostat office.

As ECB policy makers prepare for what could be a pivotal meeting next week where they’ll discuss the future of their bond-buying stimulus program, one key question is whether growth will stabilize at this new pace or continue to weaken. Factory data on Thursday from Germany, the euro region’s biggest economy, provide a reason for concern, as they showed manufacturing orders fell for a fourth straight month.

Measures of confidence in the 19-nation bloc have also weakened, while IHS Markit’s gauge of private-sector activity declined in May to the lowest in 18 months. Despite all this, and potential risks related to global trade tensions and Italy’s new government, ECB Chief Economist Peter Praet has reaffirmed his confidence in the “underlying strength” of the region’s economy, and said on Wednesday that the Governing Council will have to make an assessment of quantitative easing at its meeting next week.

G6+1:

US President Trump finds himself isolated from other G-7 leaders at the summit in Quebec beginning today. The meetings on Friday and Saturday will be the first opportunity for America’s closest allies to express their frustration in face-to-face meetings with Trump after he imposed steel and aluminum tariffs last week.

President Emmanuel Macron of France has warned that he will not sign the summit’s traditional joint statement unless progress is made on tariffs and other contentious issues, an official in his office said on Wednesday. Macron has concluded that other G-7 leaders must stand up to the American president, added the official, who requested anonymity in keeping with rules of the French president’s office.

German Chancellor Angela Merkel is promising to challenge Trump on the environment, and European leaders will be able to press their request for exempting some EU companies from Washington’s revival of Iranian economic sanctions.

Macron and Canadian Prime Minister Justin Trudeau met Wednesday in Ottawa, capping it off with a friendly, 3-hour private dinner, according to a French official in Macron’s office. Trudeau and Macron both said they hoped the G-7 would be ambitious, and agreed that, if unity isn’t a realistic option, they shouldn’t hesitate to isolate the U.S., the official said.

Turkish Lira Gets a Rate Boost:

Turkey joined a string of emerging-market central banks whose interest-rate decisions have surprised investors, tightening policy on Thursday for the third time in less than 2 months. The lira surged and the nation’s bonds rallied.

A combination of a rising US dollar, spiraling inflation, widening budget and current account deficits, and political pressure for lower rates spurred a flight from lira assets in May. The central bank responded to the rout by first raising its late-liquidity window by 300 basis points at an unscheduled meeting, and then announcing a decision to simplify its interest-rate regime, setting the one-week repurchase rate as its main funding tool.

India’s central bank this week raised its benchmark for the first time since 2014, joining peers in Indonesia, Mexico and Argentina. Brazil is also coming under pressure from investors.

FX Updates:

USD/SGD:

Spot: 1.3345

USDSGD bounced off its 1.3300 support yesterday, amid overnight USD weakness. The pair looks likely to maintain within its trading range between 1.3300 and 1.3500 for the time being.

AUD/USD

Spot: 0.7608

AUDUSD pared earlier gains in the week, declining back to 0.7600 earlier today following investor risk-off sentiment overnight. Despite failing to capitalize on a bullish breakout on Tuesday, the near-term momentum for the currency pair remains to the upside provided 0.7600 holds.

USD/CAD:

Spot: 1.2984

USDCAD approached its 1.3000 level overnight, with the Canadian dollar weakening against most major peers ahead of the Canadian May jobs report scheduled for release tonight. Poloz said last night consumer debt and housing prices are easing, and also talked about “solid” economic expansion. A strong jobs report tonight is likely to push the currency pair back to its 1.2750 support level.

USD/CNH:

Spot: 6.3999

USDCNH recovered back to 6.4000, following a decline in recent days, as emerging-market currencies retreated across the board and as China’s foreign reserves declined for a second month. Following the breach of the pair’s previous key level at 6.3800 late last month, the bias remains to the upside with the 200-day moving average around 6.4580 the next target.

USD/JPY:

Spot: 109.67

USDJPY stopped short of regaining about its 200-day moving average midweek, instead declining back below 110 earlier today ahead of key risk events over the near horizon. The G7 summit commences this weekend, while the Trump-Kim meeting is slated for June 12. In addition, the Fed and BOJ will be releasing monetary policy decisions next week too.

GBP/USD:

Spot: 1.3417

GBPUSD pulled back overnight after reaching the highest level in 2 weeks at 1.3472, on broad USD weakness. Investors remain cautious amid the UK government’s internal wrangling over Brexit; Brexit Secretary David Davis yesterday made threats that he would resign if PM Theresa May fails to add a deadline to the ‘backstop’ proposal, a fall back agreement which will state the UK will remain part of the customs union for an extended period of time of the UK and EU fail to come to an agreement by March next year.