May 18, 2018

Daily Observations:

Most Asian indices edged higher Friday as investors kept a cautious watch on developments in US-China trade negotiations. The US dollar remains perched near a 5-month peak while the benchmark 10yr Treasury yield hit its highest in 7 years.

China Offers Trump Package to Slash US Trade Deficit:

China has offered US President Donald Trump a package of proposed purchases of American goods and other measures aimed at reducing the US trade deficit with China by some $200 billion a year, US officials familiar with the proposal said. The offer came during the first of two days of US-China trade talks in Washington aimed at resolving tariff threats between the world’s 2 largest economies, but it was not immediately clear how the total value was determined, according to Reuters news.

One of the sources said US aircraft maker Boeing Co would be a major beneficiary of the Chinese offer if Trump were to accept it. Boeing is the largest US exporter and already sells about a quarter of its commercial aircraft to Chinese customers. Another person familiar with the talks said the package may include some elimination of Chinese tariffs already in place on about $4 billion worth of US farm products including fruit, nuts, pork, wine and sorghum.

However, Bloomberg news has reported that Trump is doubting the US and China can come to an agreement over trade. “Will that be successful? I tend to doubt it,” he said in a briefing. The sides are expected to exchange new proposals during the top-level talks on Thursday and Friday in Washington, National Economic Council director Larry Kudlow said. Chinese Vice Premier Liu He is also scheduled to meet with Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross and US Trade Representative Robert Lighthizer, according to the White House.

El-Erian Warns of Emerging Market Debt:

Mohamed El-Erian tweeted out his own warning on emerging-market risks, joining Harvard economist Carmen Reinhart in saying the developing world is in worse shape than many investors think.

“Higher oil prices + rising interest rates + appreciating dollar, the trifecta that continues in #markets today (albeit not in an extreme fashion), tends to test the ‘self-insurance’ of several #EMergingMarkets, together with their economic policy responsiveness,” wrote El-Erian, chief economic adviser to Allianz SE and a Bloomberg Opinion contributor.

That trend continued during trading on Thursday: Crude oil climbed to its highest ($72.30/bbl) in more than 3 years while the yield on 10yr US Treasuries rose to its highest (3.13%) since July 2011 and the Dollar Index traded near its yearly high (93.632).

Italian Coalition Worries EU:

Italy’s emerging ruling coalition is likely to put deeper euro zone integration on hold and could set the stage for the bloc’s next crisis if it delivers on its tax-cutting and high-spending policies, European policymakers and economists fear. Italy’s anti-establishment 5-Star Movement and the far-right League are nearing a government coalition deal that would bring together two parties which both want to challenge European Union limits on government borrowing and spending.

Japan Inflation Slows for Second Month:

Headline inflation in April slowed, gaining 0.6% from a year ago, lower than the consensus estimate of a 0.7% gain and slowing from March’s rise of 1.1%. Core inflation, which strips out the effects of fresh food and energy, rose 0.4% over the same period, in line with expectations but also slowing from the prior month’s increase of 0.5%.

The latest fall in the BOJ’s key inflation gauge will likely heighten questions about the sustainability of its stimulus program, which is widely thought to be both at the limits of its powers and producing diminishing returns. Still, private economists are pushing back their forecasts for when the BOJ will begin tightening policy. Key factors going forward will be oil prices and the yen’s exchange rate.

FX Updates:

USD/SGD:

Spot: 1.3428

USDSGD was steady early Friday, maintaining above its 1.3400 handle. 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: 0.7508

AUDUSD pared previous day’s gains, retreating back to the 0.7500 handle after failing to add on a recent bounce from 5-month lows near 0.7400. Reaction to Wednesday’s Australian jobs report was mixed. Renewed USD buying interest has prompted AUD selling around 0.7550, although the AUDUSD pair remains supported above 0.7400 due to positive trading sentiment in the commodity space. In particular, copper, which was seen lending some support to the commodity-linked Australian Dollar.

USD/CAD:

Spot: 1.2826

USDCAD gained on NAFTA headlines overnight; renegotiations has failed to produce a workable agreement by the US’ self-imposed Thursday deadline. Chances of a successful NAFTA closure for 2018 are looking slim as Mexico gears up for a Presidential election, and the incoming President of Mexico is likely to shake up the entire negotiating team, bringing the entire process to a grinding halt.

However, oil’s recent ascent to a 3-year high will continue to add some support to the Canadian dollar. As the US dollar has been technically due for a pullback, any stronger-than-expected Canadian data on Friday could result in a further drop for USDCAD. In this event, the next major downside support barrier lies around the 1.2700 area. Any breakdown below 1.2700 could open the way for further downside towards the 1.2528 low of mid-April.

USD/CNH:

Spot: 6.3599

USDCNH maintained below its key 6.3800 resistance this week, despite continued broad USD strength. A break out above could signal a reversal of the currency pair’s downtrend which has lasted for about a year.

USD/JPY:

Spot: 110.92

USDJPY continues to rise, tracking the uptick in US Treasury yields. The pair reached briefly breached 111 earlier today, its highest level in almost 4 months. The currency pair is likely to make another leg up to its next resistance level of 111.60.

GBP/USD:

Spot: 1.3507

GBPUSD continues to fluctuate around the 1.3500 handle, but looks poised to close out the week lower amid USD strength and Brexit uncertainty. 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.