Issue#: 523/2019

Spot values at a glance:







Daily Observations:

Asian stocks traded modestly higher and US equity futures pointed to a gain on expectation Beijing might add economic stimulus after data showed China’s economy lost steam in April. The yuan was little changed and the dollar ticked higher. Trading volumes remained lackluster, signaling little conviction in the gains, with investors still reeling from the breakdown in trade negotiations in the past week. The Australian dollar was the biggest loser among the world’s largest currencies after poorer-than-expected Chinese economic data.


Trump Recommends Fed Match China’s State Support:

President Donald Trump called on the Federal Reserve to “match” what he said China would do to offset economic hardship being caused by tariffs as he sought to draft the US central bank into his simmering trade war.

“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,” the president said in a tweet Tuesday. “If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event, China wants a deal!”

The president later told an audience in Louisiana that “with a little quantitative easing” US growth would hit 5%, referring to the Fed’s emergency bond purchases following the 2008 crisis. The campaign was unpopular with many of Trump’s fellow Republicans, who said it would cause a surge in inflation.

His suggestion that the Fed could help him counter China in the countries’ trade war builds on Trump’s repeated efforts to pressure the Fed to stimulate the US economy, even though growth is solid and unemployment is at a 49-year low. The remarks may also help him deflect blame onto the Fed if the escalating trade dispute causes the US economy to stumble as he seeks re-election in 2020.

Trump has repeatedly criticized the central bank, urging it to deliver a drastic rate cut and resume bond purchases in an April 30 tweet. Fed officials raised interest rates four times last year but have since signaled an extended pause as they wait for a tight labor market to lift inflation that has been persistently too low.

While financial markets expect the Fed to cut interest rates in the next year, Chairman Jerome Powell and his colleagues have indicated they don’t see a strong case for a move either way. They’ve also stressed that they will make moves independent of any political considerations.


China Economic Data Disappoints:

China’s economy lost steam in April after a rebound in March, even before President Donald Trump’s latest tariff increase arrived to further darken the outlook. Industrial output rose 5.4% from a year earlier, versus a median estimate of 6.5%. Retail sales expanded 7.2%, compared to the 8.6% projection. Fixed-asset investment slowed to 6.1% in the first four months, versus a forecast 6.4%.

State investment accelerated throughout the first 4 months, while private investment growth continued to slow. Manufacturing investment rose 2.5% in the first 4 months, the slowest pace since 2004. Infrastructure and property investments rose 4.4% and 11.9% respectively.

Despite months of targeted stimulus measures, the faltering pace in April demonstrates that the recovery was fragile and is now threatened further by the sharpening of the trade war. Bloomberg predicts that instead of paring back stimulus as the April Politburo meeting suggested, policy makers may again step on the gas as the nation’s 2020 growth goal is threatened.


Gundlach Warns of Increasing Weakness in US Economy:

Some weakness is showing up in the US economy despite lofty predictions of growth, according to Jeffrey Gundlach, the chief investment officer of DoubleLine Capital.

The Atlanta Federal Reserve recently forecast real gross domestic product at 1.6%, and a Citigroup Inc. basket of economic indicators has fallen to its lowest level since the financial crisis, Gundlach said on an asset-allocation webcast Tuesday. The Atlanta Fed figure can be volatile.

The probability of a recession in the next 2 years “would be extremely high,” Gundlach said. “Twelve months I’d give you a recession probability that’s 50-50. Next 6 months I’d probably have it down at 30%.” Gundlach also indicated odds of a Fed rate cut in the next 12 months are about 70%. The economy has been growing largely because of a debt scheme as the US increases spending and fuels deficits beyond expansion in output. The bond market is “extremely exposed” to a downturn in the US dollar, because some foreign buyers have been purchasing Treasuries without currency hedges.


Will China Dump Treasuries Amid Trade War?

In a Bloomberg article released earlier today, it was reported that tensions rippling through global financial markets could lead Beijing to reduce its stockpile in the $15.9 trillion Treasuries market, not to retaliate, but to defend its currency if it goes into free-fall. The offshore yuan has slumped 2.4% this month as the trade standoff intensified, reaching the weakest since December.

The spectre of Treasuries being deployed as a weapon in the trade spat surfaced via a tweet from a Chinese journalist on Monday that said the nation’s scholars are “discussing the possibility of dumping” US government debt. The post came after trade negotiations last week ended without a resolution. Beijing on Monday said it will increase levies on some American goods in retaliation for the latest US tariff hikes.

Macquarie Securities Ltd. says China is unlikely to let the yuan’s slide get out of control, as it could lead to capital outflows and sharper depreciation. In 2016, Chinese authorities unloaded about $188 billion of Treasuries, 15% of the total, as the yuan sank almost 7% amid capital flight.

China’s Treasuries holdings are still more than double where they stood before the US recession and comprise about a third of the country’s $3.1 trillion in foreign-exchange reserves. It taps those coffers to manage its currency.

US officials have warned China against deliberately weakening the yuan to combat the hit from US duties. But most strategists say China’s painful experience with devaluing the yuan in 2015, which prompted an exodus of capital, is likely to dissuade such a move. But the consensus is that any further selloff would be a last resort. For one thing, China would struggle to find other places to park its cash. But it would also have to consider the consequences for its own economy, if a stronger yuan undermines exports.

Even if China did dump Treasuries, yields might not rise that far. Any such move would probably trigger risk aversion that drives other investors to snap them up as a haven. What’s more, the Fed is about to start adding to its Treasuries again, providing a buffer to the marketplace.


Fed Officials Pledge Rate Patience:

Federal Reserve officials are sticking with their pledge for patience on interest rates, shrugging off President Donald Trump’s escalating trade war and his pressure for a cut.

New York Fed President John Williams and his Kansas City colleague Esther George, who vote on policy this year, acknowledged that new tariffs on Chinese imports could affect the outlook for US inflation and growth. But both saw no need for the central bank to react. “Policy is in the right place,” Williams said in a Bloomberg Television interview Tuesday in Zurich. “I don’t see any reason to have a bias up or downward in the current circumstances. We’re going to evaluate, assess, to see the best decision to get us to our goals.”

Fed officials held rates steady at their April 30-May 1 meeting and said they will be “patient” on judging the next move in policy after previously signaling they saw no need for a move all year. “This wait-and-see approach is appropriate because we have not seen upward pressures building on inflation, even though we have experienced above trend growth and a further tightening of labor markets,” George told an audience in Minneapolis.

Investors, on the other hand, have increased their bets that the central bank will cut rates this year after China retaliated against Trump’s tariffs and the US warned there was more to come. George said she wasn’t ignoring the message from markets. “In the context of an economy that is still growing above potential, the labor market that continues to add jobs, a falling unemployment rate, I don’t see an argument right now for a rate cut,” she said.

That followed other similar comments from Fed officials in recent days, including Atlanta’s Raphael Bostic, who said he was “willing to be patient,” and Boston’s Eric Rosengren, who told Bloomberg Monday it’s too early to tell whether the trade dispute will hurt the US economy.


China State Media Takes Harder Line on Trade War:

Among China’s most surprising responses to the trade war has been its reluctance to use its vast state media empire to rally the home front. That’s changed since US President Donald Trump’s latest tariff barrage, according to Bloomberg news earlier today.

In recent days, the once-banned phrase “trade war” has roared back into widespread use in Chinese media. Meanwhile, official news outlets gave high-profile play to commentaries urging unified resistance to foreign pressure, including an editorial from the nationalist Global Times calling the trade dispute a “people’s war” and threat to all of China.

Such sentiments have found an eager audience, with a state television video vowing a “fight to the end” attracting more than 3 billion views since Monday. The clip was the most-read piece on China’s Twitter-like social media platform Weibo earlier Tuesday.

The rhetorical shift underscores the risks that China’s Communist Party veers toward a more nationalistic position as the trade war drags on and weighs on economic growth. Chinese President Xi Jinping, like Trump, has promised to rejuvenate his country and can’t afford to look weak in the face of foreign power.

So far, China’s state media have sought to tamp down the kind of patriotic passions that fueled a backlash against Japanese interests when a territorial dispute flared in 2012. Even now, state media commentaries focused the blame on the U.S. government, rather than the country as a whole.

Maintaining that balance is difficult in a country where all school children are taught about the country’s “century of humiliation” at the hands of colonial powers. China’s top trade negotiator, Vice Premier Liu He, has already found himself the targeted by unflattering comparisons to the Qing dynasty official who signed an 1895 treaty with Japan that surrendered the island of Taiwan. Liu stressed in remarks to state media after failed trade talks Friday in Washington that any deal should be “balanced” to ensure the “dignity” of both nations.

On Wednesday, the People’s Daily ran another commentary saying China will never make decisions that “give up power and humiliate the country,” a phrase used in school textbooks to describe the treaties China signed at the turn of the 20th century. “The Chinese people’s belief in upholding the rights and dignity of the nation, their determination, is rock solid.”


Sources: Bloomberg


FX Updates:


Spot: 1.3680

USDSGD retreated from  a 4-month high earlier today, as investors await further developments in the US-China trade war. The pair briefly traded above the 1.3700 handle yesterday – the first time it has done so this year. The Singapore dollar has also been under pressure as the IMF recently warned of more downside risks to Singapore’s economic growth. A decline back to the 200-day moving average of 1..3652 is possible over the near term.



Spot: 0.6930

AUDUSD continued to decline, making a fresh 4-month low Wednesday, as disappointing China economic data released earlier today underscored concerns about the global growth outlook. With  the 0.7000 support recently broken, the bias remains firmly lower.



Spot: 1.3462

USDCAD was mostly unchanged earlier today as the pair continues to remain capped at the 1.3500 resistance. Canadian inflation is due out later today and is expected to remain stable. The overall longer-term trend of USDCAD continues to remain to the upside.  Oil prices rose overnight after Saudi Arabia reported a drone attack on one of its pipelines yesterday.



Spot: 6.9008

USDCNH pared yesterday’s gains, but remains above the 6.9000 handle. The yuan is currently at its weakest level, against a basket of trading partners’ currencies, since January, according to Bloomberg’s replica of the CFETS RMB Index. USDCNH has risen 3.2% since mid-April amid a re-escalation in trade tensions between US and China. The recent high at 6.9805 remains a key resistance point.



Spot: 109.65

USDJPY was largely unchanged, after declining to the 109 handle yesterday, a fresh 3-month low. The pair has shed more than 2% over the past month, and is due for a pullback soon. A bounce back up to 110.80 is possible over the coming week.



Spot: 1.2912

Brexit pessimism continues to weigh on GBPUSD, as the pair fell back below its 200-day moving average of 1.2958 last night. The pound couldn’t benefit from yesterday’s lowest unemployment rate since 1974, amid growing tension over the disagreements between the two parties to the Brexit talks. Recent developments concerning the Brexit suggest that the UK PM May will put forward her Brexit proposal for a vote in the parliament during the week beginning on June 03. Though, the opposition Labour party is still challenging the optimism by sticking to their own demands.


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UEN: 201419754M

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