September 19, 2017

Daily Observations:

Asian stocks pared some of their earlier session gains as investors lightened on positions ahead of the Federal Reserve’s 2-day policy meeting starting tonight. The yuan slipped amid efforts by policy makers to counter excessive strengthening, while the US dollar maintained gains. Then yen and gold held near fresh lows even as geopolitical risks continue to lurk in the background as Trump prepares to address the UN for the first time.

Geopolitics:

• US President Donald Trump is slated to ask world leaders to stand with America in opposition to North Korea and Iran’s nuclear ambitions. In a phone conversation with his Chinese counterpart, Xi Jinping, both agreed on the need to be “maximizing pressure” on North Korea, according to the White House.
• Trump will address the United Nations General Assembly on Tuesday for the first time, with European leaders looking for him to recommit to the Iran nuclear deal struck by his predecessor. On Monday, the president said the world will “see very soon” whether the US will withdraw from the agreement.

US:

• Republican lawmakers are making a last, last last-ditch effort to repeal and replace the Affordable Care Act after earlier attempts failed. Republicans have until September 30 to pass a health care reform with a simple majority in the Senate. After that, 60 votes, and therefore support from some Democratic lawmakers, would be required. Shares of hospitals and health insurers, which may experience a hit to earnings if Obamacare is repealed, declined on Monday.
• Markets maintained a risk-on sentiment, as US equities advanced to fresh records. The S&P 500 Index (+0.15%) held above 2,500 to follow the Dow Jones Industrial Average (+0.28%) in notching fresh records. The Nasdaq Composite (+0.10%) eked out gains as well.
• Morgan Stanley strategists believe the strong run for equities portends a better-than-expected third-quarter earnings season, kicking off in a month. The CBOE Volatility Index hit single digits for the first time in over a month as investors unwound insurance held over the weekend.
• Most analysts surveyed by Bloomberg have opted, though, not to boost their forecasts for the S&P 500 at year-end, leaving the median estimate at 2,500. According to Bloomberg news, with the Fed poised to begin the process of shrinking its $4.47 trillion balance sheet next month, which may lift the term premium of Treasury yields, most analysts feel that would lead to deflating equity valuations.
• Goldman Sachs’ year-end S&P 500 target is 2,400, implying about a 4% drop from current levels, while Bank of America’s forecast is 2,450.
• The views of the Wall Street strategists contrast with retail investors, who are the most bullish on the US stock market in at least 15 years. Respondents in the latest University of Michigan survey of consumer sentiment said there was a 65% chance that $1,000 invested in a stock fund today will have appreciated in a year’s time.
• The US dollar gained overnight, mostly against the Canadian dollar and sterling pound which weakened, and ahead of the FOMC meeting this week where policy makers are widely expected to announce the unwinding of a $4.5 trillion balance sheet. The Dollar Index was largely muted, and continues to hold around the 92 handle.
• US yields continue to inch higher before the Fed meeting this week; the benchmark 10yr Treasury yield gained 3bps to a 1-month high of 2.23% last night.

Canada:

• The Bank of Canada gave the strongest indication yet it is concerned about the Canadian dollar’s recent gains, with a top official saying policy makers will closely monitor the currency’s impact on the economy. Deputy Governor Timothy Lane outlined the factors that went into that which included stronger business spending and recent gains in foreign sales that had been helped by the Canadian dollar’s weakening in recent years.
• However, he stressed that the central bank “will be paying close attention to how the economy responds to both higher interest rates and the stronger Canadian dollar”.

UK:

• Bank of England Governor Mark Carney said in a speech yesterday that while the decision to leave the EU has slowed growth, it’s also cut the economy’s potential. That reduced “speed limit”, as he has previously described it, increases the chance of overheating and partly explains why the Monetary Policy Committee now says it may need to raise rates soon.
• Economic growth slowed in the first half of the year, reflecting sluggish consumer spending, and inflation has accelerated to almost 3%. Carney’s comments add weight to the idea that above-target price growth is in fact becoming more entrenched and cannot be ignored, rather than being a short-term spike as a result of the fall in the pound.
• The BOE expects price growth to remain above its 2% goal in the coming years and said last week it may soon need to lift its benchmark rate from a record-low 0.25%.

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.

Australia:

• In the RBA’s minutes of this month’s policy meeting, where rates were left unchanged, the central bank gave no indication that policy was set to change anytime soon. The RBA also said it expects to see solid employment growth ahead as the economy gradually picks up, while noting risks from housing debt outpacing household income.

Precious Metals:

• Spot gold is set to decline for its fourth straight session after sliding 0.8% to a low of $1,304.71/Oz last night. Broad risk-on sentiment since the weekend has dampened safe haven demand despite looming geopolitical risks. Gold investors will now cast a worrying eye on to the FOMC meeting this week.
• The precious metal should be supported at its key $1,300/Oz level for the time being, although more-hawkish than expected comments during the Fed meeting may push it back below $1,300/Oz. To the upside, the key resistance above lies at $1,375.34/Oz – a 3.5-year high.
• Silver for immediate delivery slumped to 3-week low, down 2.6% to $17.0646/Oz.

Oil

• Crude oil futures continue to trade just under $50/bbl before US crude stockpile data as refiners delay scheduled maintenance after Hurricane Harvey hit the Gold Coast and shuttered almost a quarter of the nation’s refining capacity.
• American crude stockpiles probably rose 3 million barrels last week, according to a Bloomberg survey before an Energy Information Administration report on Wednesday.
• Caribbean islands still recovering from Irma are bracing for a third hurricane strike in 2 weeks, as Maria tracks toward the US coast.

Cryptocurrencies:

• Bitcoin has rallied to breach $4000, soaring more than 20% from the lows reached Friday, as concern eases that a crackdown by Chinese regulators will hinder the growth of the alternative method of exchange. After reaching a record high of $4,921 on Sept. 1, the digital currency fell as low as $2,975 on Sept. 15.

USDSGD:

• Spot 1.3472
• USDSGD pared some of its overnight 0.3% gain to 1.3497, as the currency pair failed to gain above the 1.3500 handle.
• The resistance remains around the recent high of 1.3539, while the key support below lies at 1.3350.

AUDUSD:

• Spot 0.7970
• AUDUSD failed to recover back above the 0.8000 handle following the release of the RBA minutes earlier today, after the central bank stressed the need to balance the risk of high household debt and low inflation.
• The currency pair is still lower on the day by about 0.5%, at around 0.7970.
• The RBA minutes were taken to be less hawkish than predicted, and a retreat back to 0.7800 is possible.

USDCAD:

• Spot 1.2303
• USDCAD rallied 1.2% to a session-high of 1.2338 overnight, following comments by a BOC official indicating that the strength of the Canadian dollar is being monitored.
• Having strengthened more than 11% in 4 months against the dollar, the Canadian dollar looks poised to extend its current pullback over the near 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 6.5885
• The PBOC weakened its reference rate earlier today, from 6.5419 to 6.5530 per US dollar.
• USDCNH extended its recent rebound by a further 0.4% to 6.5960 earlier today, its highest level in 2 weeks, amid efforts by policy makers to counter excessive strengthening.
• China eased restrictions on shorting the yuan last week, seen as a sign Beijing wants to counter a surge that’s seen the currency gain 6.1% this year.

USDJPY:

• Spot 111.52
• USDJPY looks set to gain for the seventh straight day after rising by as much as 0.4% to 111.66 earlier – a 6-week high.
• The 200-day moving average of 112.20 is next in line to be tested; the next significant level beyond that lies at 115.

GBPUSD:

• Spot 1.3515
• GBPUSD retreated by as much as 0.6% to 1.3465 last night, before recovering back above the 1.3500 today.
• Despite some less-hawkish comments by Governor Carney yesterday, the BOE is still widely expected to raise rates in the coming months, and increasing rate hike expectation should push to currency pair toward the 1.4000 handle