September 18, 2017

Daily Observations:

Stocks advanced in Asia following a record-breaking Wall Street session, while the yen and gold declined as havens retreated amid optimism the US favors a peaceful resolution to North Korea’s nuclear threats. Focus now turns to Fed meeting this week, where officials are expected to announce the start of the reduction of the central bank’s $4.5 trillion balance sheet, while keeping the benchmark rate unchanged.

Geopolitics:

• The US seeks a peaceful resolution but is prepared to use military force if diplomatic efforts fail to end the nuclear standoff with North Korea, said Secretary of State Rex Tillerson, following the launch of another missile over Japan last week.
• But both he and other top officials warned during media appearances this weekend that although a peaceful resolution is desired, a military response is still available. National Security Adviser H.R. McMaster said “all options” remained on the table for dealing with the regime. US Ambassador to the UN Nikki Haley added that US President Donald Trump’s remark about raining “fire and fury” down on North Korea wasn’t an idle threat.
• South Korean President Moon Jae-in and Trump spoke by phone on Saturday night and agreed that North Korea’s threats and escalation of hostilities will only bring about its collapse, according to a government account of the conversation.
• The US won’t push for more UN sanctions against North Korea when the General Assembly opens next week in New York, but Trump plans to urge individual world leaders to keep ratcheting up pressure on North Korea, 2 top administration officials said.

US:

• Retail sales in August fell 0.2% month-on-month, reversing a gain of 0.3% in July and missing the median estimate of a 0.1% gain.
• Industrial production disappointed as well, declining 0.9% from a month ago. This was compared to a 0.4% rise in July and the consensus forecast of a 0.1% expansion.
• The Empire Manufacturing Index this month slipped to 24.4, from 25.2 in August; a reading of 18.0 was expected. The University of Michigan sentiment index declined to 95.3 in September, from 96.8 last month, beating the 95.0 reading predicted by economists.
• US stocks capped the best week since January, with the S&P 500 Index climbing above 2,500 for the first time on Friday, as investors showed resilience in the face of a North Korea missile text last week. The benchmark index ended 0.18% higher at 2,501.40. The Dow Jones Industrial Average (+0.29%) closed at a record high as well, while the Nasdaq Composite (+0.30%) briefly reached an all-time high.
• The US dollar ended on a weaker note Friday and was largely unmoved earlier this morning. The Bloomberg Dollar Spot Index slipped 0.3% but still managed to register its biggest weekly gain since February as the Bank of England’s hawkish shift greatly bolstered the pound against the dollar. The Dollar Index declined back below the key 92 level.
• US yields were higher ahead of the FOMC meeting this week, despite softer retail and industrial data on Friday. The benchmark 10yr Treasury yield rose 2bps to 2.20% on Friday.
• Investors’ focus now turn to the Fed’s meeting this week, where officials are expected to announce the start of the reduction of the central bank’s $4.5 trillion balance sheet, while keeping the benchmark interest rate unchanged. With the outlook for the US economy clouded by Hurricane Harvey investors will be tuning in to a fresh round of speeches by Fed Chair Janet Yellen and regional Fed presidents for clues on the central bank’s next moves.

UK:

• The pound climbed to the highest level against the dollar since just after the Brexit vote and UK government bonds tumbled as Bank of England policy maker Gertjan Vlieghe last Friday stoked speculation of an interest-rate increase within months. Vlieghe, considered a dovish voter, said “the evolution of the data is increasingly suggesting that we are approaching the moment when the bank rate may need to rise”.
• Money markets are now pricing a more than 75% chance of a rate increase in November, with a 25bps rise fully priced for February and a second one by December 2018. Some currency analysts said 2 hikes might be a step too far given the uncertainty over Brexit and the economic outlook.

Japan:

• Japanese Prime Minister Shinzo Abe is considering a snap election as early as October, according to NHK, amid swelling support for his government’s handling of the North Korean crisis. Scandals had opened up the possibility of Abe being replaced by someone within the LDP; now, Japan’s cabinet has an approval rating higher than its disapproval rating for the first time in 3 months.

Singapore:

• Electronics exports in August rose 21.7% year-on-year, up from the prior month’s increase of 15.3% and surpassing the median estimate of 15.0%.
• Non-oil domestic exports increased 17.0% from a year ago, improving upon July’s 7.6% rise and surpassing the 11.8% increase expected.

Precious Metals:

• Spot gold sold off last Friday, falling 0.4% to $1,320.10/Oz, and was little changed earlier during Asian trade. Precious metals continue to trade weaker ahead of the FOMC meeting this week, amid hawkish market sentiment with an expectation of balance sheet unwinding to be announced.
• Long-term momentum continues to be biased to the upside, with gold having broken the important psychological resistance of $1,300/Oz last month. $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 declined to a fresh 2-week low, down 1.0% to $17.5823/Oz on Friday.

Oil

• Crude oil futures continue to trade just under $50/bbl, as US rig count dropped the most since January after a record expansion earlier this year.
• Futures were little changed earlier today, after advancing 5.1% last week. Rigs targeting crude oil fell by 7 to 749, according to data Friday from Baker Hughes Inc. Drillers haven’t added any new machines during the past 5 weeks, capping in August the first monthly drop since May 2016.
• A third hurricane, though, this month is tracking toward the Caribbean and strengthening along the way.

Cryptocurrencies:

• The world’s central banks can’t sit back and ignore the growth in cryptocurrencies as it could pose a risk to the stability of the financial system, according to the Bank for International Settlements.
• It said central banks will need to figure out whether to issue a digital currency and what its attributes should be, though the decision is most pressing in countries like Sweden where cash use is dwindling. Institutions need to take into account of not only privacy issues and efficiency gains in payment systems, but also economic, financial and monetary policy repercussions, the BIS said in its Quarterly Review.

USDSGD:

• Spot 1.3441
• USDSGD fell by as much as 0.2% to 1.3425 earlier today on the back of a weaker greenback. Gains in Asian stocks today have also supported the demand for regional currencies.
• The resistance remains around the 1.3500 handle while the key support below lies at 1.3350.

AUDUSD:

• Spot 0.8027
• AUDUSD regained back above the 0.8000 handle, advancing 0.4% to 0.8035 earlier.
• The Australian dollar has been supported by increasing bets that the RBA will follow its UK and Canadian counterparts in turning hawkish. However, Aussie bulls may want to take note that iron ore has slipped below its 50-day moving average, which may cap further gains in the currency.
• A retest of the 2015-high at 0.8164 remains on the cards.

USDCAD:

• Spot 1.2183
• USDCAD remains capped below the 1.2200 handle, due to continued strength in crude oil prices and a weaker US dollar.
• The currency pair slid 0.2% to 1.2172 earlier today. 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 6.5577
• The PBOC strengthened its reference rate for the second session in a row, from 6.5423 to 6.5419 per US dollar earlier today.
• USDCNH was little changed earlier Monday, after sliding 0.1% to 6.5479 on Friday.
• The yuan’s 6.1% surge this year is proving a double-edged sword, risking hurting the nation’s exports even while boosting the chances of currency and capital control reforms, according to a Bloomberg report.

USDJPY:

• Spot 111.16
• USDJPY gained 0.4% to 111.25, and looks poised to gain for a sixth straight day, following comments from US Secretary of State Tillerson saying that the US is seeking a peaceful resolution to its nuclear standoff with North Korea.
• The 1-month resistance level around 111 is currently in danger of being breached; the next significant level lies at 115.

GBPUSD:

• Spot 1.3593
• GBPUSD ended last week higher by 3%, at 1.3594, registering its largest weekly gain in years as traders priced in increased odds of a BOE rate hike in February 2018.
• The currency pair is making a renewed push to break beyond the 1.3600 handle. The subsequent resistance target lies at the 1.4000 level – a level not seen since last year’s June referendum.