June 9, 2017

Daily Observations:

The pound tumbled as early projections show the UK may face a hung parliament, leaving the nation’s course unclear as it contends with exiting the EU. Other markets showed little reaction. Most Asian equities were slightly positive. The US dollar was stronger, while gold retreated for a third straight day.

US:

• Ousted FBI chief James Comey and US President Donald Trump accused each other of lying about their private encounters in the wake of last night’s dramatic Senate testimony that centred on whether the president sought to quash part of a federal probe into Russian meddling in the 2016 election.
• Lawmakers will have to determine whether Comey’s testimony shows that Trump crossed any legal boundatries. While Comey told senators he found the discussion with trump “a very disturbing thing”, he added that, “I don’t think it’s for me to say whether the conversation I had with the president was an effort to obstruct.” He further said that was special counsel and former FBI director Bob Mueller’s job to sort out.
• Comey’s testimony did little to impact financial markets. The USD strengthened overnight, with the Bloomberg Dollar Spot Index rising 0.2% in New York, largely driven by euro weakness in the wake of Draghi’s dovish comments. The gauge added a further 0.3% in Asia today, following a slumping sterling pound amid the prospect of a hung parliament after Thursday’s general election.
• The benchmark US 10yr Treasury yield added 2bps to 2.19% last night, after paring gains of as much as 4bps.
• US equities were barely changed, other than the tech-heavy Nasdaq Composite index, which advanced 0.4% on the back of strong performances from NVidia and Alibaba.

Canada:

• Bank of Canada Governor Stephen Poloz offered an upbeat tone on the economy, saying he is comforted by recent signs of economic strength even as the central bank warned that rising consumer debt levels and an unbalanced housing market have raised household vulnerabilities.
• With about 100 of the possible 60 seats left to be announced, the race is still on a knife’s edge. Even if the Conservatives remain the biggest party, they may need an alliance to govern, less than 2 weeks before Brexit talks start.

UK:

• UK broadcasters BBC, Sky and ITV all forecast a hung parliament, which could mean the nation is left without a functioning government before formal Brexit negotiations start this month. The Tory party could gain a total of 318 seats, the BBC projected, short of the 326 seats needed for a majority, leaving Prime Minister Theresa May’s future in doubt.

Europe:

• ECB president Mario Draghi reminded everyone that although the euro-area economy may have turned the corner, the job market is still far from healthy, while on the inflation front, nothing substantial has changed due to “subdued nominal wage growth”.
• The remarks, accompanied by a cut in the ECB’s inflation forecast, mean that monetary stimulus could be around for a long time to come. In addition, there was no formal discussion on how to taper the 2.3 trillion euro bond-buying program.
• Inflation forecasts were altered to 1.3% in 2018 and 1.6% in 2019, down from 1.6% and 1.7% respectively.
• Eurozone GDP last quarter expanded 1.9% year-on-year and 0.6% quarter-on-quarter, beating expectations of 0.5% and 1.7% respectively.

China:

• PPI in May rose 5.5% from a year earlier, missing the 5.6% gain predicted and slowing from the 6.4% gain in April.
• CPI, over the same period, climbed 1.5%, matching the median estimate and quickening from the 1.2% rise last month.
• According to a Bloomberg report, resurgent factory inflation since last year has moderated, in step with the faltering global commodity rally. Regulatory efforts to contain financial leverage may also weigh on property and infrastructure investment in the second half of the year, denting a crucial pillar for raw material demand. Global commodities sank to a 1-year low this week, which may further erode raw material prices for Chines producers.

Japan:

• BOJ Governor Haruhiko Kuroda said the country had escaped from deflation but still had more progress to make before its goal for 2% inflation. The economy grew 1% year-on-year in the first quarter, expanding for the fifth straight quarter – longest streak in a decade. However inflation remains far away from the BOJ’s target.

Precious Metals:

• Spot gold extended its retreat from the $1,300/Oz level, falling 1.0% to $1,271.43/Oz earlier today, its lowest level since last Friday.
• On Wednesday, total holdings in SPDR Gold Shares, the world’s largest gold-backed ETF, soared by 14.5 tonnes to its highest this year amid strong demand of safe haven assts.
• A convincing break above the $1,300/Oz may propel the yellow metal to the next resistance region of $1,350/Oz.
• Silver for immediate delivery declined back below its 200-day moving average, falling 1.8% to $17.3045/Oz.

Oil

• Crude oil futures expiring in July remained little changed, seemingly finding some support around the $45.50/bbl handle. US data released Wednesday showed crude and fuel stockpiles rose, going against expectations of further declines.
• The Energy Information Administration also forecast earlier this week the nation’s crude output wills urge next year to a record above 10 million barrels a day.
• In Nigeria, Royal Dutch Shell Plc lifted restrictions on exports of a key crude halted for more than a year.
• The low last month of $44.13/bbl remains as the next level of support.

USDSGD:

• Spot 1.3823
• USDSGD was little changed, with the currency pair continuing to consolidate just above the 1.3800 handle.
• USDSGD remains near its lowest level since October, with the pair holding near its 1.3800 handle for the fifth consecutive day.
• A break below 1.3800 and the next level of 1.3725 may be tested soon.

AUDUSD:

• Spot 0.7532
• AUDUSD extended its retreat from a 2-month high for a second day, falling 0.3% to 0.7524. The pair is likely to remain supported above the 0.7500 level, with a move back up to 0.7600 looking more likely.

USDCAD:

• Spot 1.3515
• USDCAD was little changed as it continues to hold above the 1.3500 handle after Bank of Canada Stephen Poloz’s upbeat tone on the economy helped to offset lower oil prices.
• The resistance at 1.3540 – a 2-week high, represents the next target level for the currency pair.

USDCNH:

• Spot 6.7876
• The PBOC strengthened its fixing earlier today to 6.7971, from 6.7986, to the US dollar.
• USDCNH advanced 0.1% to 6.7913 earlier, extending its recent rebound form a 7-month low reached on 1 June.
• The resistance remains at the psychological 6.8000.

USDJPY:

• Spot 110.32
• USDJPY rose 0.3% to 110.38, just shy of its 200-day moving average, after Kuroda earlier today fuelled speculation that the end of the BOJ’s quantitative easing program remains nowhere in sight.

GBPUSD:

• Spot 1.2766
• GBPUSD slid by as much as 1.9% to 1.2695 earlier today, after the first exit poll predicted the Tories winning 314 sears, spurring concerns of a hung parliament.
• A separate Bloomberg survey of 11 banks and brokerages conducted showed that GBPUSD could plunge to as low as $1.2000 in the event of a hung parliament, though that is below the median forecast for a level of $1.2350.