October 25, 2016

Daily Observations:

Asian stocks fluctuated near its weekly highs, buoyed by a generally upbeat corporate earnings season and reports showing manufacturing is picking up in the US and euro area. The US dollar strengthened versus most peers, while the yuan touched an all-time low in offshore trading. Government bonds declined broadly.

US:

  • The Fed’s St Louis President James Bullard said December is “most likely” for tightening, while his colleague, Fed Chicago President Charles Evans, said he expects 3 hikes by end-2017.
  • According to Fed funds futures pricing data on Bloomberg, the odds of a rate-hike in December rose yesterday to 71%, from 68%.
  • The preliminary October US Markit factory PMI rose to 53.2 from 51.5 prior, the highest in 12 months and beating the consensus estimate of 51.5.
  • Treasury yields climbed after the release of better-than-expected PMI data, as the benchmark 10yr yield gained 3bps to 1.76%.
  • JPMorgan Chase’s global currency volatility index fell to its lowest level this year on speculation that markets have sufficiently priced the probability of a US rate hike in the coming months. The US dollar maintained near its strongest level since March, with the Bloomberg Dollar Spot Index little changed today following yesterday’s 0.1% gain.
  • The S&P 500 Index rose 0.5%, after posting its first weekly gain in three amid a flurry of M&A activity. Tech, consumer-discretionary and consumer-staples sectors led gains, while telecoms and energy shares sold off.

Canada:

  • Bank of Canada Governor Stephen Poloz, in a testimony to the House of Commons in Ottawa, said that the central bank’s “best plan right now is to wait for the next 18 months or so”. His comments sent the Canadian dollar tumbling, which later recovered after Poloz clarified that he wasn’t referring to monetary policy.

China:

  • PBOC Deputy Governor Yi Gang wrote in article that there is no basis for persistent yuan devaluation, and that China will continue to keep the yuan rate “basically stable at a reasonable and equilibrium level”.
  • Goldman Sachs noted that yuan weakness may lead to increase in China gold demand.

Singapore:

  • Consumer prices posted the smallest decline in 21 months in September, signalling a record slump in inflation that began almost 2 years ago may be nearing an end.
  • Headline CPI fell 0.2% from a year earlier, matching estimates and falling at a slower pace than August’s decline of 0.3%. Core CPI rose 0.9% year-on-year, in line with estimates, but slower than last month’s 1.0% rise.

Precious Metals:

  • Spot gold briefly traded above its 200-day moving average of $1,270.38/Oz last night, but fell sharply back towards the $1,260/Oz handle where it currently is trading at. Such bearish price action could signal more downside for the precious metal. The previous support of $1,250/Oz could be tested soon.
  • Spot silver was relatively unchanged, paring most of its gains earlier in the session and currently trades just above the $17.50/Oz handle.

Oil:

  • Crude oil for December delivery fell 0.7% to settle at $50.52/bbl, after comments from Iraq Oil Minister Al-Luaibi over the weekend who said Iraq should be excluded from production curbs because it’s embroiled in a war with Islamic militants.
  • In addition, Russia has refused again on Sunday to commit to joining OPEC in trimming production.

 

USDSGD:

  • Spot 1.3934
  • USDSGD advanced 0.2% to 1.3949 as the currency pair continues its ascent. The 1.4000 remains a viable near-term target.

 

AUDUSD:

  • Spot 0.7621
  • AUDUSD pared losses of as much as 0.6% to recover back above the 0.7600 handle, amid some speculation that the RBA might not cut rates next week. Tomorrow’s inflation data should provide further clues.
  • Most of the forecasts for a rate-cut next week were made before RBA’s new governor took helm last month and Philip Lowe has since elevated financial stability’s importance in the making of monetary policy and stressed that he and his colleagues aren’t “inflation nutters”.

 

USDCAD:

  • Spot 1.3337
  • Poloz’s comments sent USDCAD swinging wildly in either direction by almost 0.5% before finally reverting back to its prior session’s close.
  • With only a 10% odds of a rate-cut in December, the risk of a weaker Canadian dollar continue to remain high. The reasonable target of 1.3500 should be reached soon.

 

USDCNH:

  • Spot 6.7832
  • Offshore yuan hit a new low earlier today of 6.7885 against the US dollar – 0.1% weaker from yesterday’s close, before paring losses after the PBOC’s daily fixing which was set 0.08% weaker to 6.7744.
  • Both offshore and onshore yuan remain the weakest Asian currencies versus the US dollar this year, posting declines of 3% and 4% respectively.
  • Citigroup is projecting the yuan to weaken to 6.8900 in a few weeks.

 

USDJPY:

  • Spot 104.44
  • USDJPY rose 0.6% to 104.89 on the back of rising US dollar demand. The near-term resistance at 104.50 will most likely be breached soon.
  • The next key resistance above comes in at 107.50.

 

GBPUSD:

  • Spot 1.2220
  • GBPUSD fell 0.4% to the 1.2200 handle earlier today before paring back some of its declines; the currency pair continues to consolidate within the 1.2100 – 1.2350 range over the past 2 weeks.

 

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