November 13, 2017

Daily Observations:

Equities in Asia started the week mixed as investors digested political news from the UK and Australia over the weekend. The US dollar advanced against all major counterparts, while the pound and Aussie dollar weakened. Much focus will remain on the US tax reform as talks continue this week.

Geopolitics:

US President Donald Trump offered to help resolve territorial disputes in the South China Sea as he entered the final leg of his 11-day swing through Asia. Trump is scheduled to meet Philippine President Rodrigo Duterte on Monday as he attends 2 days of meetings on regional security affairs before heading home. A key discussion point will be how to lower tensions in the South China Sea, a major global shipping lane that contains oil and gas reserves.

On Saturday, Trump said it was “certainly a possibility” that he could become friends with Kim Jong Un, shortly after he tweeted about the “short and fat” North Korean leader.

China Opens Up:

China took a major step toward the long-awaited opening of its financial system last Friday, saying it will remove foreign ownership limits on banks while allowing overseas firms to take majority stakes in local securities ventures, fund managers and insurers. The new rules will give global financial companies unprecedented access to the world’s second-largest economy and bolstered the reform credentials of Chinese President Xi Jinping less than a month after he cemented his status as the nation’s most powerful leader in decades. It also coincided with Trump’s visit to Beijing, though the US president didn’t know it was coming.

Foreign financial firms applauded the move. While China has already made big strides in opening its equity and bond markets to foreign investors, international banks and securities firms have long been frustrated by ownership caps that made them marginal players in one of the fastest-expanding financial systems on Earth.

According to a Bloomberg report, regulators are still drafting the rules. Below is a list of what is known so far:

• Foreign firms will be allowed to own stakes of up to 51% in securities ventures; China will scrap foreign ownership limits for securities companies 3 years after the new rules are effective
• The country will lift the foreign ownership cap to 51% for life insurance companies after 3 years and remove the limit after 5 years
• Limits on ownership of fund management companies will be raised to 51%, then completely removed in 3 years
• Banks and so-called asset-management companies will have their ownership limits scrapped

Saudi Shakeup:

Saudi Arabia’s King Salman has no intention of formally handing over the throne to his son, Crown Prince Mohammed bin Salman, any time soon. The recent detention of high-profile businessmen and senior princes, as well as current and former government officials as part of an alleged anti-corruption campaign spurred suspicion that King Salman was smoothing the way for a transfer of power to his son in short order. A Saudi official said “there is no possibility” that the king will abdicate, citing Salman’s “perfect” physical and mental powers

UK Uncertainty:

Embattled UK Prime Minister Theresa May faced a fresh challenge as the Sunday Times said 40 Conservative members of Parliament, nearly enough to trigger action, have agreed to sign a letter of no confidence in her. May’s opponents are now 8 lawmakers short of what’s needed for a leadership challenge, the newspaper said.

Meanwhile, the UK Labour Party accused May of lacking the support within her Conservative Party to deliver the Brexit transition period she’s proposed, and urged her to work instead with the opposition to pave the way for one.

Sterling came under pressure early Monday on the negative news reports. With a slew of Bank of England members due to speak, along with updates on UK inflation, the labor market and retail sales, expect a bumpy week ahead for the currency.

Australian Political Turmoil:

Fresh political turmoil in Australia risks undermining fragile economic confidence as the loss of another lawmaker in the dual-citizenship fiasco left Prime Minister Malcolm Turnbull leading a minority government. As the Australian economy balances the risks of a housing correction, record household debt and persistently low growth, a crisis of political confidence could further undermine economic confidence.

FX Updates:

USD/SGD:

Spot: 1.3613

USDSGD continues to remain biased to the upside, after breaking out of its downward channel in end-October. The October-high of 1.3714 remains a key resistance. To the downside, the pair has been well-supported around its 1.3600 handle.

AUD/USD:

Spot: 0.7654

AUDUSD slipped lower early Monday on fresh political concerns which threaten to stall PM Turnbull’s legislative agenda. The pair approached its 4-month low of 0.7652; a break below could lead to a retest of the longer-termed uptrend, established since Jan 2016. 0.7530 is the number to look out for should we witness fresh lows in AUDUSD this week.

USD/CAD:

Spot: 1.2689

USDCAD declined for a second straight week last Friday, falling to its lowest since Oct. 26. The base of its medium-term trend line since September should provide some support this week, and a retest of the 1.2900 handle is possible. To the downside, a retreat below 1.2655 is likely to lead to a reversion to the 1.2450 support.

The Canadian dollar is not expected to strengthen greatly after recent dovish comments from BOC Governor Poloz. Poloz had stated his confidence inflation will reach the 2% target, bolstering the market view the central bank won’t tighten at the next meeting on Dec. 6.

USD/CNH:

Spot: 6.6575

USDCNH was little changed following Trump’s China visit, with the pair gaining 0.40% for the week ended last Friday. The pair’s 3-month high at 6.6904 is expected to cap any future moves higher, due to the overseas investors recently buying up onshore assets, as reported by Bloomberg on Monday.

Global funds boosted their holdings of Chinese bonds and stocks to record levels in September, with total ownership crossing 2 trillion yuan. Corporations, which built up stockpiles of overseas currencies in recent years as the yuan slid, now have a reason to bring money home as well, thanks to the yuan’s 4.5% gain in 2017.

USD/JPY:

Spot: 113.67

USDJPY continues to trade within a limited range last week, as it has been over the past 3 weeks. The stubborn resistance of 114.50 continues to cap upside moves, while the 113 support refuses to give way as well. A slight bias remains to the upside.

A break above 114.50 could result in the currency pair embarking on a longer-term move upwards, with the double-top at 118.60 a realistic possibility within the next year.

GBP/USD:

Spot: 1.3119

The pound weakened in early Monday this week on the letter of no confidence in PM Theresa May. The GBPUSD retreated back to its 50-day moving average of 1.3110, however the major support level lies at the 1.3000 psychological handle.

Ahead of a week of BOE speakers and economic data, further political and/or Brexit uncertainty could trigger a further selloff in the pound. A break below 1.3000 could lead a quick move towards 1.2812 – the pair’s 200-day moving average, last crossed in April this year.