March 19, 2018

Daily Observations:

Asian share markets slipped into the red on Monday as caution gripped investors in a week in which the Fed is likely to hike US interest rates and perhaps signal that as many as 3 more lie in store for the rest of the year. The Dollar Index firmed above 90 as it approached a 2-week high, while the benchmark Treasury 10yr yield gained to 2.85%. Gold slipped to a 2-week low.

New PBOC Chief:

China named Yi Gang to run its central bank, elevating a long-serving deputy governor with deep international links to the forefront of efforts to clean up the nation’s financial sector and modernize monetary policy, Bloomberg news reported.  The National People’s Congress, China’s legislature, will almost certainly approve President Xi Jinping’s choice for governor of the People’s Bank of China in a formal vote due Monday.

By promoting an official who has served as No. 2 to incumbent governor Zhou Xiaochuan for more than a decade, China is signalling that it is seeking policy continuity at the central bank.

Trump Urged to Avoid Tariffs:

45 US  trade associations representing some of the largest companies in the country are urging President Donald Trump not to impose tariffs on China, warning it would be “particularly harmful” to the US economy and consumers. The organizations said in a letter sent to Trump on Sunday that potential tariffs on China would raise prices on consumer goods, kill jobs and drive down financial markets.

The groups instead called on Trump to work with trade allies to push for changes to China’s policies. The business groups said while they had serious concerns about China’s approach to trade, unilateral tariffs by the US would only separate the country from allies, and encourage them to replace the US business presence in China when Beijing retaliates. Trade associations publicly pushing back include the US Chamber of Commerce, the National Retail Federation and the Information Technology Industry Council.

Fed Hike:

Traders and investors turn will focus the bulk of their attention on Wednesday’s FOMC meeting – Jerome Powell’s first meeting as chairman of the Fed. It comes just weeks after he hinted to investors that he’s open to lifting the policy rate 4 times this year, rather than the 3 currently reflected in dot-plot forecasts. Officials will update those forecasts this week, and Powell will hold a press conference, after his February signals encouraged a fresh round of US yield-curve flattening.

Some Wall Street banks (notably Goldman Sachs Group Inc.) expect the median projection of 2018 hikes to climb to 4 at this meeting. Others doubt that central bankers, who’ve reiterated their intention to move gradually, would ramp up expectations so quickly, especially after a round of mediocre data reduced estimates of economic growth. At stake for traders is whether the rout in shorter-maturity Treasuries will continue, or if yields will plateau for now.

Putin Clinches Landslide Victory:

Vladimir Putin cruised to a victory in Russia’s presidential vote, extending his 18-year rule amid escalating confrontation with the West. The Kremlin’s longest-serving leader since Soviet dictator Joseph Stalin had almost 77% of the vote with about 95% of the ballots counted, putting him on track for a new six-year term. The results represented record support for Putin, who barely campaigned before Sunday’s vote and faced no real competition in an election that even some of his seven rival candidates described as a farce.

MAS to Tighten in April?

According to a Bloomberg news article, economists are split on whether the Monetary Authority of Singapore will change its policy stance in April amid subdued inflation pressure. 4 of 7 economists see the central bank shifting to a tightening stance next month, according to a Bloomberg survey conducted March 13-16. The MAS opened the door to a possible move in its October policy meeting, after easing three times between January 2015 and April of last year. All 4 economists who projected an April tightening in the latest survey see the central bank adjusting the slope, rather than the width or centre, of the currency band, which it doesn’t disclose.

In Singapore, policy makers are faced with an “expansionary” budget that will underpin a recovering economy, albeit one with weak inflation. February CPI is due for release on Friday and is expected to have risen 0.4% from a year ago.

FX Updates:

USD/SGD:

Spot: 1.3184

USDSGD extended Friday’s rebound, recovering closer to the 1.3200 handle to start off the week. Friday’s inflation data will be closely watched, ahead of the central bank’s policy review in April.

The longer-term trend remains to the downside, as indicated by the downtrend channel since Dec 2016. Although the currency pair has halted making lower lows over the past 2 months. The key support remains at 1.3000, while a break above 1.3340 will signal a possible reversal in trend.

AUD/USD

Spot: 0.7705

AUDUSD extended its tumble below its 200-day moving average earlier today, registering a new year-to-date low in the process. AUDUSD briefly traded below 0.7700, after slumping iron ore demand continues drag the Australian dollar we5ker.

Bloomberg news reported that shipments of iron to China, the world’s largest consumer are slowing as tighter financial conditions and moderating growth curbed demand, leading the price of higher grade ore 13% lower over the past 3 weeks.

A move lower to 0.7600 is expected, where the currency pair’s longer-term uptrend base resides at.

USD/CAD:

Spot: 1.3102

USDCAD extended its breakout above the 1.3000 level earlier today, edging 0.1% to 1.3110. The Canadian dollar has been weighed down by ongoing Nafta concerns even after Canada secured a metal tariff exemption last week and recent dovish comments by BOC Governor Poloz.

The momentum remains strongly to the upside; the next resistance lies at 1.3250.

USD/CNH:

Spot: 6.3339

USDCNH rebounded higher amid strength in the greenback, ahead of this week’s FOMC policy meeting. The pair has been ranging between 6.2500 and 6.3700 since end-January but may turn higher if the Fed’s statement turns out to be more hawkish than expected.

USD/JPY:

Spot: 105.82

USDJPY continues to languish below 106, after the yen strengthened as a nationwide survey showed a decline in support for Japanese Prime Minister Shinzo Abe’s cabinet, which has championed yen weakness.

The survey was largely conducted before the ministry’s admission Monday to doctoring documents tied to the deal — suggesting that future polls could be worse for Abe. A retest of the recent lows around 105.35 is looking likely.

GBP/USD:

Spot: 1.3932

GBPUSD was little changed from Friday’s close of 1.3942, with pound traders cautiously awaiting signs of progress of a Brexit transition deal. UK Brexit Secretary David Davis expressed confidence that a deal was “within reach” ahead of the Mar. 22-23 EU summit.

Sterling pound’s recent rise against the greenback has stopped short in recent days, with the pair struggling to recover back above 1.4000.