May 16, 2018

Daily Observations:

Asian stock markets dipped on Wednesday after Pyongyang abruptly called off talks with Seoul, throwing a US-North Korean summit into doubt, while surging bond yields revived worries about faster US interest rate hikes that could curb global demand.

Korean Talks Suspended:

North Korea said its suspending “high-level” talks with South Korea scheduled for Wednesday over military drills Seoul has scheduled with the US, while cautioning Washington to “consider the fate” of next month’s summit between Kim Jong Un and Donald Trump “carefully.” The statement announcing the suspension came from KCNA, North Korea’s state-run news agency. It wasn’t immediately clear whether the move indicated a breakdown in broader talks between Pyongyang and Seoul, which have intensified following a recent face-to-face meeting between Kim and his counterpart, South Korean President Moon Jae-in. State Department spokeswoman Heather Nauert said planning for the Trump-Kim summit continues and that the US hasn’t received any notification about potential hurdles.

US Retail Sales Climb, Treasuries Tumble:

US retail sales in April gained 0.3% month-on-month, in line with consensus estimates, as bigger after-tax pay checks helped compensate for rising fuel costs, signalling consumer demand was off to a firm start this quarter. March’s increase was revised upwards as well.

Strong retail sales data fuelled bets that the Fed will boost interest rate 3 more times this year, pushing 10yr Treasury yields to the highest since 2011, briefly rising above 3.09% last night. According to Bloomberg fed funds futures, the probability of 3 more hikes in 2018 has risen to 58% from 51% earlier this month. On top of Fed tightening, Treasuries have come under siege from a flood of new issuance as the nation’s budget deficits widen. And inflation expectations are hovering near the highest since 2014, after years of doubts about whether prices and wages would increase.

China Home Prices Rise:

China’s new home prices rose 0.5% in April from a month earlier, compared with an increase of 0.4% in March, Reuters calculated from National Bureau of Statistics (NBS) data published earlier today.  Compared with a year earlier, average new home prices in China’s 70 major cities increased 4.7%, slowing from a 4.9% gain in March.

China has rolled out property cooling measures in more than 100 cities since 2016, as the country aims to contain property bubbles while ensuring a soft landing in the economy.

Traditional Havens Offer No Safety:

Last night stock market declines was coupled with fallouts in traditional safe haven assets such as gold and bonds. Spot gold fell below its key $1,300/Oz support, while the bonds sank after the benchmark 10yr Treasury yield soared to its highest since 2011, hitting an intraday peak of around 3.09%. It appeared to investors last night that the only place to hide was in cash, or more specifically, in the US dollar. The broadly-followed Dollar Index gained to 93.457, its highest level since December last year.

Assets falling in tandem last night has been widely attributed to the 10yr yield soaring above the 3% mark, underpinned by economic reports and rising crude-oil prices. In turn, creeping inflation and a seemingly improving US economy have prompted speculation that the Fed will raise rates a faster-than-anticipated pace this year.

Nafta Negotiations Likely to Miss Deadline:

President Donald Trump’s plans to rewrite the North American Free Trade Agreement this year looked unattainable Tuesday after negotiators appeared too far apart to strike a deal before a deadline this week. US House Speaker Paul Ryan had set this Thursday as an informal deadline if the administration were to push a pact through the Republican-controlled Congress before a new slate of lawmakers arrives in Washington next year, possibly led by Democrats.

Mexican Economy Minister Ildefonso Guajardo said Tuesday that a deal was unlikely by Thursday, voicing frustration at US demands for a five-year sunset clause and the elimination of Nafta’s dispute-resolution mechanisms. The deadline was a soft one, but each day after that date without an accord makes US ratification of an accord this year more difficult to achieve.

FX Updates:

USD/SGD:

Spot: 1.3436

USDSGD regained back above its 200-day moving average following a broadly stronger greenback overnight. The currency pair looks poise to retest its 2018 high of 1.3490 reached last week.

The momentum continues to remain to the upside, with the pair’s 200-day moving average now serving as a line of support. The next resistance of 1.3540 may be tested soon.

AUD/USD

Spot: 0.7462

AUDUSD looks on course to retest the 0.7400 handle, after failing to hold above 0.7500 overnight on the back of USD strength. Aussie traders will be focusing on the Australian employment figures dropping on Wednesday. A dovish RBA has been hobbled by sagging economic growth, and poorer-than-expected employment numbers could further widen expectations of interest rate differentials between Australia and the US, pushing the currency to new multi-month lows.

USD/CAD:

Spot: 1.2863

USDCAD rebounded back above 1.2900 last night, but pared some of its gains later after the Canadian dollar found footing stemming from crude oil’s resilience above the $70/bbl handle. The 1.3000 resistance continues to be relevant from a technical perspective. A consolidation around this region may pave the way for more gains.

USD/CNH:

Spot: 6.3588

USDCNH approached its key 6.3800 resistance earlier today but has since pared its advance. A break out above could signal a reversal of the currency pair’s downtrend which has lasted for about a year.

USD/JPY:

Spot: 110.24

USDJPY broke above the 110 handle yesterday and has since been supported above it. A close above the February high of 110.50 would confirm the breakout and pave the way for the currency pair’s next leg up to next resistance level of 111.60.

GBP/USD:

Spot: 1.3513

GBPUSD descended below 1.3500 last night but failed to hold below, regaining back above 1.3500 amid reported USD profit-taking and as UK labor data came in in line with estimates. The momentum remains skewed towards the downside for the currency pair. A break below the 1.3450 level is likely to signal further downside, with the next support coming in around 1.3310.