September 14, 2017

Daily Observations:

Asian equities were mixed earlier today, after poorer-than-expected economic data from China indicated that its economy is cooling. The Australian dollar rallied back above US$0.8000 after employment numbers strongly beat estimates. The US dollar continues to remain supported on a renewed push by the Trump administration for tax reforms. Gold and Treasuries declined as odds for a US rate-hike this year rose.

Geopolitics:

• NBC News is reporting that North Korea has been observed moving mobile missile launchers over the past 48 hours, per multiple senior officials in the US military, which may be more sabre-rattling or a prelude to another test. New seismic data suggests North Korea’s Sept. 3 nuclear test may have been more than twice as strong as initially estimated.
• Kim Jong Un’s regime slammed the recent round of sanctions as “evil” and pledged to accelerate its quest for nuclear capabilities that will allow for a strike against the continental US in its first official response to the new sanctions. According to Nikkei news, China may have already cut off its textile trade with North Korea ahead of the passage of the UN Security Council’s resolution.
• Earlier today, North Korea made an explicit threat to use a nuclear weapon to sink Japan. “The four islands of the archipelago should be sunken into the sea by the nuclear bomb of Juche,” North Korea’s state-run news said Thursday, and added that “Japan is no longer needed to exist near” them.

US:

• August PPI rose by 0.2% month-on-month, reversing a 0.1% drop in July, but less than the 0.3% gain predicted. Core PPI reversed as well, from a 0.1% fall in the previous month to a 0.1% increase last month, compared to the median estimate of a 0.2% rise.
• President Donald Trump blocked a Chinese-backed investor from buying Lattice Semiconductor Corp., a personal rebuke that bodes poorly for several other Chinese buyers seeking US security clearance for their acquisitions. It was just the fourth time in a quarter century that a US president has ordered a foreign takeover of an American firm stopped because of national-security risks. Trump acted on the recommendation of a multi-agency panel, the White House and the Treasury Department said Wednesday. The spurned buyer, Canyon Bridge Capital Partners LLC, is a private-equity firm backed by a Chinese state-owned asset manager.
• Trump has blasted China’s practice of forcing firms to transfer their intellectual property and recommended that the US trade representative should consider investigating China over its IP policies. He will reportedly visit China in November with North Korea’s nuclear ambitions high on the agenda, though this move may complicate talks.
• Trump administration officials and congressional Republican leaders are promising a new framework in 2 weeks for legislation that would overhaul the US tax code, though they’ve shied away from releasing any details about how the changes would affect individuals or corporations. Trump, however, told reporters that the plan would benefit the middle class, not the wealthy.
• The US dollar rallied for a third straight session as US tax reform hopes resurfaced, with the Bloomberg Dollar Spot Index gaining 0.4%, and the Dollar Index jumping 0.7% to regain back above the 92 resistance handle.
• Treasury yields gained with expectation of another rate hike this year picking up ahead of inflation data due later tonight. The benchmark 10yr Treasury yield gained 2bps to 2.19% – its highest close in 3 weeks.
• The 3 main equity indices in the US closed at record highs for a second straight day, with the Dow Jones Industrial Average and the Nasdaq Composite gaining 0.18% and 0.09% respectively. The S&P 500 Index added 0.08% to close just shy of the 2,500 mark.
• While the current S&P 500 rally is officially now the third-strongest in history, gaining 269% since March 2009, the advance appears less impressive when measured by annualized returns – the fourth weakest out of 13 cycles with a gain of about 17% a year.
  

UK:

• The jobless rate in July fell to 4.3%, from 4.4% previously, to reach a 42-year low. Employment change rose to 181,000, from 125,000 previously, more than the 150,000 increase predicted.
• Wage growth however lagged, and maintained at 2.1% year-on-year, lower than the median estimate of 2.3%.
• The squeeze has taken a toll on consumer spending, creating a drag on the economy. Bank of England Governor Mark Carney has said that an “element of Brexit uncertainty” is preventing firms from awarding bigger wage increases, while other explanations include poor productivity and companies clamping down on pay to offset rising import costs, another Brexit fallout.

China:

• Retail sales in August rose 10.1% year-on-year, slowing from the prior month’s rise of 10.4% and below the consensus forecast of 10.5%. This was also the slowest reading in 2017 so far.
• Industrial production over the same period slowed to a 6.0% year-on-year gain, from a 6.4% increase in the prior month; analysts were predicting a 6.6% gain.
• Fixed asset investment in urban areas disappointed as well, slowing to a 7.8% rise in the first 8 months of the year, from 8.3% previously; economists had forecasted an 8.2% increase.
  
• The continued cooling of the Chinese economy suggests that efforts to rein in credit expansion and reduce excess capacity are hitting home ahead of the key 19th Party Congress in October. Still, producer-price inflation and a manufacturing sentiment gauge both exceeded estimates earlier this month, signalling some resilience.

Japan:

• PPI in August was unchanged from a month ago and rose 2.9% from a year before, lower than the consensus forecasts of 0.1% and 3.0% respectively.

Australia:

• Australian employment climbed more than twice as much as estimated in August, led by a jump in full-time roles. Overall employment rose by 54,200, improving upon July’s gain of 29,300 and dwarfing the median estimate of 20,000. The jobless rate maintained at 5.6, in line with expectations.
• Full-time employment climbed by 40,100, reversing a 19,900 decline in the prior month. 14,100 part-time jobs were added, down from the 49,100 increase in July. The participation rate rose to 65.3%.
• Traders are now pricing in a 53% chance of an interest rate increase in June next year, having previously expected a tightening in September 2018.

Precious Metals:

• Spot gold reversed its previous session’s gain, slumping 1.2% to $1,319.26/Oz earlier today amid broad risk-on sentiment, continued strengthening of the US dollar and increased speculation that the Fed will hike rates again this year.
• Long-term momentum continues to be biased to the upside, with gold having broken the important psychological resistance of $1,300/Oz 2 weeks ago. $1,300/Oz now acts as a strong support level while the key resistance above lies at $1,375.34/Oz – a 3.5-year high.
• Silver for immediate delivery mirrored gold’s reversal, falling by as much as 1.6% to $17.6698/Oz overnight.

Oil

• Crude oil futures held gains near a 5-week high earlier today, after rising 2.2% to $49.30/bbl in New York after the International Energy Agency and OPEC improved their outlooks for demand.
• The IEA sees global oil demand rising this year by the most since 2015, while OPEC boosted projections for consumption in Europe and China. Plus, the cartel and its allies are said to be considering an extension of their output-cut deal.
• In the US, refineries are set to process more crude as they come back online after Hurricane Harvey led gasoline inventories to tumble the most on record last week.

USDSGD:

• Spot 1.3507
• USDSGD gained 0.5% to 1.3518, its highest level in a week, following the continued strengthening of the US dollar.
• USDSGD pared a 2-day gain, retreating 0.2% to 1.3442 today on the back of a weaker US dollar.
• Resistance remains at 1.3500 while the key support below lies at 1.3350.

AUDUSD:

• Spot 0.8007
• AUDUSD recovered some of its overnight decline, gaining back above the 0.8000 handle following a better-than-expected jobs report earlier today.
• With odds of an earlier rate hike increasing, the currency pair is expected to be supported despite a strengthening greenback.
• A retest of the 2015-high at 0.8164 is possible.

USDCAD:

• Spot 1.2178
• USDCAD looks poised to gain for a third straight session, despite paring some of an overnight gain. The pair retreated back below 1.2200 but is still 0.3% up on the day.
• Having strengthened more than 11% in 4 months against the dollar, the Canadian dollar looks poised for a pullback over the medium term. The first point of resistance is likely to come in at the 1.2400 handle.
• The key support at 1.1920 is likely to hold.

USDCNH:

• Spot 6.5541
• The PBOC weakened its reference rate for a third day, by 0.13% to 6.5465 per US dollar earlier today.
• USDCNH gained 0.4% to 5.5592, extending its rebound from an 18-month low reached last Friday.

USDJPY:

• Spot 110.49
• USDJPY rose by as much as 0.7% to 110.73 earlier, but pared some of it following North Korea’s threat to use a nuclear weapon to sink Japan.
• The 1-month resistance level around 111 remains the handle to be tested next; on a longer term basis, 115 represents a more significant level.

GBPUSD:

• Spot 1.3204
• GBPUSD fell 0.6% to 1.3185, following slower than expected wage growth in yesterday’s jobs report.
• The next key resistance lies around the region of 1.3450 – 1.3500.