October 15, 2018

Daily Observations:

Last Friday’s rebound in global equities failed to gain traction today, with equity indices in Asia falling across the board. Treasuries nudged higher amid the cautious tone in markets, with the yield on the 10yr benchmark slipping to 3.15%. The yen pushed higher alongside gold prices. Oil climbed amid rising tensions between the US and Saudi Arabia over a missing journalist. The pound slipped as Brexit deal hung in the balance with just days to go until a critical deadline.

Trump Weighs Saudi Action:

Saudi Arabia is running out of time to explain to the Trump administration what happened to journalist Jamal Khashoggi within its consulate in Turkey. The administration increasingly regards Saudi Arabia’s denial of any involvement of Khashoggi’s disappearance as untenable, and President Donald Trump and his aides are more and more convinced that the Washington Post writer died after entering the Saudi consulate on Oct. 2 to pick up a document for his wedding, said three US officials who asked not to be identified because of the sensitivity of the matter, according to a Bloomberg news report.

Despite increasing pressure from Congress, Trump is reluctant to cancel multimillion-dollar arms sales to Saudi Arabia out of concern the US ally will turn to Russia or China instead. But a range of other punishments are under discussion within the administration, from downgrading diplomatic relations or sanctioning Saudi officials to following major US companies in withdrawing officials from an investment conference in Riyadh later this month.

The administration is holding off, for now, as the Turks and Saudis jointly investigate what happened to Khashoggi, a Saudi citizen and US resident who wrote critically of Crown Prince Mohammed bin Salman’s regime for the Washington Post. Turkish officials have said they believe he was killed and dismembered in the consulate; the Post and New York Times have reported that a team of Saudi agents flew to Istanbul and left the same day of Khashoggi’s visit.

More Trump Tariff Threats:

President Donald Trump threatened to impose another round of tariffs on China and warned that Chinese meddling in US politics is a “bigger problem” than Russian involvement in the 2016 election. Asked in an interview with CBS’s “60 Minutes” whether he wants to push China’s economy into a depression, Trump said “no” before comparing the country’s stock-market losses since the tariffs first launched to those in 1929, the start of the Great Depression in the US.

“I want them to negotiate a fair deal with us. I want them to open their markets like our markets are open,” Trump said in the interview that aired Sunday, while adding that more tariffs “might” be in the mix. So far, the US has imposed 3 rounds of tariffs on Chinese imports totaling $250 billion, prompting China to retaliate against US products. The president previously has threatened to hit virtually all Chinese imports with duties.

Brexit Talks Hit a Snag:

The UK and the EU are on course to miss this week’s key milestone on the road to a Brexit deal after talks broke up in stalemate on Sunday, people familiar with the matter said. A weekend of intense negotiations, including a surprise dash by Brexit Secretary Dominic Raab to meet his EU counterpart Michel Barnier in Brussels, failed to break the deadlock.

There will be no further attempt to resolve the impasse before EU leaders gather in the Belgian capital on Wednesday for the summit they’d hoped to use to finalize the divorce.

Officials on both sides have now all-but given up on a breakthrough this week, and are increasingly concerned that time is running out to get an agreement before the UK’s exit in March next year, the people said, speaking on condition of anonymity because the talks are confidential.

“Despite intense efforts, some key issues are still open,” Barnier said on Twitter after his hour-long meeting with Raab. For his part, the Brexit secretary left Brussels and traveled back to London without making any comment.

PBOC Preparing for All Risks in Currency Policy:

China’s central bank is considering a range of risks in its currency policy, including a worst-case scenario, Governor Yi Gang said. As the yuan inches closer to the psychologically important level of 7 per dollar amid rising trade tensions with the US, the PBOC governor told Bloomberg in an exclusive interview that the Chinese currency is at a “reasonable and equilibrium level.”

“The yuan’s volatility is normal,” Yi said on Sunday in Bali, Indonesia, on the sidelines of the International Monetary Fund and World Bank’s meetings. “The currency has a flexible exchange rate mechanism, which now shows two-way fluctuation.”

Yi’s comments come days before US Treasury Secretary Steven Mnuchin is set to release a report in which he could label China as a currency manipulator and as a trade dispute between the world’s 2 biggest economies shows no signs of abating.

Survey Shows Key Yuan Level at 7 Likely to Hold For Now:

China is unlikely to let the yuan weaken past the key psychological level of 7 per dollar any time soon, according to market observers. Just 3 of 18 traders and analysts surveyed Wednesday and Thursday said the Chinese currency will breach that milestone in 2018, though a majority see it happening by the middle of next year. Falling beyond 7 for the first time in a decade would further strain relations with the US and spur capital outflows, some respondents said.

The yuan edged close to 7 last week after the PBOC announced a cut to the reserve requirement ratio for a fourth time this year, reflecting a growing divergence with US monetary policy. Pressure on the currency, which has tumbled 9% over 6 months, eased in the past few days amid reports Donald Trump and Xi Jinping plan to meet in November and that US Treasury Secretary Steven Mnuchin is being advised not to name China a currency manipulator.

Emerging Market Bulls Emerging :

After 2 quarters of declines, developing-nation assets will find a floor and remain stable in the final 3 months of the year as central banks from Argentina to Turkey move to defend their currencies, a Bloomberg survey shows.

Latin America eclipsed Eastern Europe, the Middle East and Africa as the region with the best prospects for currencies and bonds, while Asia was at the top for equities, according to the survey of 26 investors, traders and strategists. Mexico’s assets ranked as the most favored following the country’s presidential elections, while Argentina and Turkey, which have faced homegrown problems that fueled contagion risks, were seen likely to continue underperforming, the Sept. 25 – Oct. 2 poll showed.

FX Updates:

USD/SGD:

Spot: 1.3787

USDSGD opened the week on the front foot, amid Singapore dollar weakness as continued equity outflows from Southeast Asia weighed on the currency. A move back above 1.3800 is expected over the coming days on the back of US dollar strength. To the downside, 1.3600 represents a key support.

AUD/USD

Spot: 0.7104

AUDUSD erased last Friday’s gains to retreat back to its 0.7100 handle, as trade war escalation fears between the US and China, Australia’s largest trading partner, continue to weigh on the Australian dollar. The currency pair’s downward trend since the start of the year continues to hold, and looks on track to reach its 9-year low at 0.6828 by year-end.

USD/CAD:

Spot: 1.3026

USDCAD remained little changed earlier today from last week’s close, as the pair continues to be supported above 1.3000. With WTI having found some support above the $70/bbl handle, firming oil prices could drive the FX pair back below 1.3000 this week, and towards the 200-day moving average of 1.2888.

The downtrend channel, established since July, continues to hold, although the longer term technical bias points to the upside. The pair broke above its multi-year triangle pattern earlier this June – a breakout above of its current 3-month long downtrend channel would suggest a likely retest of the 1.3382 resistance.

USD/CNH:

Spot: 6.9167

USDCNH remains comfortably above 6.9000, with the PBOC earlier today setting tis weakest yuan fixing since Jan 2017. Investor attention looks set to shift to the key 7.000 level over the near future. Given the continued monetary policy divergence between China and US, continued weakness of the yuan versus the greenback is likely.

USD/JPY:

Spot: 112.07

USDJPY seems to have found some support at its 112 handle, having held above it since last Thursday. It seems probable USDJPY will rebound back to at least 113 over the near term. The key resistance at 114.50 remains the level to break for the pair to resume its uptrend, which began in March this year. A breach of 114.50 is likely to lead to a run up to the pair’s next resistance at 118.66.

GBP/USD:

Spot: 1.3108

GBPUSD fell as much as 0.5% earlier today to 1.3082, its lowest since Oct. 9, after a weekend of intense Brexit talks failed to break the deadlock between the UK and the EU, pairing odds of a deal that some investors hoped could be announced by early as this week.

Sources: Bloomberg