November 28, 2017

Daily Observations:

Declines in energy and mining stocks led Asian shares lower after oil and metal prices extended a drop, and Chinese equities’ losses deepened. The US dollar was steady as the US tax debate gets underway. The yen pared gains after a rally partly fuelled by report suggesting North Korea is preparing for a missile launch. Gold retreated from the $1,300/Oz handle.

Geopolitics:

Japan is said to have received radio signals suggesting North Korea is preparing for a missile launch test, according to Kyodo News and TBS. There’s a lot still up in the air, as Japan didn’t give more specifics on the type of missile, and the signals could simply be from North Korea’s winter training for the military. The yen strengthened through 111 per dollar on the report, while Treasuries advanced. North Korea’s last provocation was on Sept. 15, when it fired its second missile over Japan in as many months. The 73-day pause is the longest since a 116-day break between October 2016 and February.

US Loans Slowing:

Weekly Federal Reserve data on commercial and industrial loans hasn’t been robust in 2017, with the amount outstanding growing just 1%, compared with an average of 9.9% in each of the last 6 years. The trend has been downward since late September, as shown in the graph below.

Peter Boockvar, the chief market analyst at The Lindsey Group, wrote in a research note that he can think for four reasons why loan growth is slowing:

• companies are bypassing bank loans and getting cheaper funding in the capital markets
• Libor-based loans are getting more expensive and companies are choosing not to borrow
• corporate debt levels are at or near historic highs relative to GDP and cash flow is resulting in a pause in further borrowing
• companies are waiting until tax reform actually passes before making big corporate spending decisions

Powell Sees Higher Rates:

Jerome Powell, in a statement to the Senate Banking Committee ahead of his confirmation hearing on Tuesday, signalled broad support for how the Fed operates, regulates and guides the economy, offering a full-throated defense of the government institution he’s about to lead.

“Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target,” Powell said in the text of his remarks, which the Fed released on Monday. “We expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink.” This keeps Powell firmly in line with the trajectory for monetary policy set out by current Fed Chair Janet Yellen, whom he’ll succeed in early February if he’s confirmed.

US Tax Reform:

The GOP tax plan is heading into a make-or-break week. Senate Republican leaders plan a crucial floor vote on their bill as soon as Thursday, a dramatic moment that will come only after a marathon debate that could go all night. Democrats are expected to try to delay or derail the measure, and the GOP must hold together at least 50 votes from its thin, 52-vote majority in order to prevail.

Their chances improved this week when Republican Senator Lisa Murkowski of Alaska said she’ll support repealing the “individual mandate” imposed by Obamacare – a provision that Senate tax writers are counting on to help finance the tax cuts. Murkowski had earlier signalled some reservations about the provision; and her support was widely viewed as a positive sign for the tax bill’s chances.

Bitcoin Mania:

Bitcoin blew past $9,700 just a week after topping $8,000 and approached its closest ever to five figures, gaining mainstream market attention as it defies bubble warnings. The biggest price jump since August consolidated during Japanese trading hours and vaulted the largest cryptocurrency’s value in circulation above the market caps of all but about 30 of the S&P 500 index members. The increase also buoyed its 10-day volatility to more than 15 times the level of the euro-dollar, the most traded currency pair.

Canadian Weekly Outlook:

Two things that could impede BOC Governor Poloz from raising rates in the coming months include worries about the financial system’s ability to cope with higher borrowing costs, and concerns that plenty of labour slack remain in the economy.

Later today Tuesday, the central bank’s semi-annual report on financial stability will reveal its thinking about such risks and concerns, followed by GDP numbers and October jobs data released on Friday that will show the extent to which the economy continues to eat into its spare capacity.

China’s Housing Bubble:

China’s efforts to cool the property market may lead to the first decline in home sales since 2014 next year, highlighting the risks as officials try to battle bubbles without tanking the economy, Bloomberg News reported. As a government campaign tackling excessive leverage and financial risks chokes off some sources of buyer funding, such as consumer loans, developers could also find that credit is tighter next year. As dozens of cities maintain their curbs on property sales, new mortgages have dipped and funds for building have slowed. JPMorgan Chase & Co. sees a 6% decline in home sales in 2018.

Restrictions on home purchases that were rolled out since March 2016 will likely be maintained, and market oddities caused by the hand of the state may persist. Officials’ focus will shift toward measures such as boosting the rental market from previous efforts to reduce inventories of unsold homes, according to a commentary published Tuesday by the Economic Information Daily.

A bubble in the biggest cities such as Beijing and Shanghai risks spreading to smaller ones, increasing the likelihood and costs of a sharp slump, according to an IMF working paper this month. Developing a bigger and better rental housing market is touted as one long-term method of cooling prices and stabilizing the market, but those efforts are in their early stages.

FX Updates:

USD/SGD:

Spot: 1.3467

USDSGD rebounded off a 2-month low Tuesday, as investors monitor progress of the US tax reform which enters a crucial week of voting. Despite having broken above its trend channel since the beginning of the year, the currency pair has failed to move higher. Instead, recent USD weakness has pressured the pair back below 1.3500.

The key support lies at 1.3346 – a 15-month low. Although renewed hopes that the White House can make progress in its tax reform is likely to buoy USDSGD and push it higher towards 1.3500 this week.

AUD/USD:

Spot: 0.7602

AUDUSD retreated back towards the 0.7600 handle Tuesday as the coming few weeks could potential see the continuation of the currency pair’s downtrend.

The gap between the 2yr yield premium in Australia and the US slid below 2 basis points on Monday, and this week’s US tax reform vote, GDP data and further speeches from Fed officials could all drive the American side of the equation higher.  a dovish RBA next week or some disappointments from Australian GDP would confirm the trend.

A break below 0.7500 is likely to lead to a move further down to the range between 0.7100 and 0.7300.

USD/CAD:

Spot: 1.2763

An overnight slide in crude oil prices weighed on the Canadian dollar, leading USDCAD to rebound off its 1-month low of 1.2666. The 1.2900 is expected to be tested again over the near-to-medium term due to continued weakness in the Canadian dollar.

USD/CNH:

Spot: 6.6056

The Chinese yuan led declines in Asian emerging currencies Tuesday after Kyodo News reported North Korea may be gearing up for a fresh missile test. USDCNH rose for a third straight session, ascending back above the 6.6000 psychological level.

The key support lies at 6.5500; a decline below it may pave the way for more downside towards the 2017-low of 6.4436.

USD/JPY:

Spot: 111.21

USDJPY briefly retreated below the 111 handle Tuesday, before erasing losses after PM Abe commented that there is no need to change the BOJ’s 2% inflation target. With the key support of 112 broken last week, the bias remains to the downside for the currency pair with the 108 the next significant level in line to be tested.

GBP/USD:

Spot: 1.3338

GBPUSD reached its highest in almost 2 months early this week, ahead of more discussions between British and EU officials regarding Brexit. The clock is ticking after the bloc’s President Donald Tusk said a financial offer from the UK on the exit bill has to come by early next month to win approval to move talks on to trade at a Dec. 14-15 summit.

A potential rally above 1.3400 could be in the offing should an agreement regarding a Brexit deal be reached. Conversely, failure to do so may result in a selloff for GBPUSD back towards 1.3000.