September 20, 2017

Daily Observations:

Asian equities fluctuated, while the dollar maintained near recent lows ahead of tonight’s highly anticipated FOMC meeting. In his speech to the UN, US President Donald Trump threatened to annihilate North Korea. Gold rebounded from a 3-week low.

Geopolitics:

• US President Donald Trump gave his first speech to the United Nations General Assembly, and in it, he threatened North Korea with annihilation and delivered a provocative argument that the US and other nations should always put self-interest first. He continued to refer to Kim Jong Un as “Rocket Man”, saying the North Korean leader was on a suicide mission from himself as well as his regime.

US:

• The Federal Reserve kicked off a 2-day meeting last night, and is expected to announce an unchanged policy rate tonight and the initiation of balance-sheet normalization. Since these outcomes are largely priced in, according to Bloomberg News, attention will turn to the description of the economy, economic projections and Chair Janet Yellen’s press conference. The tone is expected to lean dovish due to recent inflation weakness, so a surprise could come in a Fed that leans toward the hawkish side of policy spectrum.
• All major US indices were up Tuesday as financial markets kept calm despite Trump’s speech to the UN. Focus now shifts to the Fed decision with stocks sitting at record highs and volatility near lows as the CBOE Volatility Index briefly traded below 10 for the second day in a row.
• US yields continue to inch higher; the benchmark 10yr Treasury yield added 1bp to 2.24% in New York. The odds of a hike by December have risen 53%, according to pricing data from Bloomberg, from 22% on Sep. 8.
  
• The US dollar weakened overnight, largely against the euro and sterling. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, slid 0.1% in New York, while the Dollar Index fell 0.3% to close below the key 92 level.
• Senators Bob Corker and Pat Toomey, 2 Republican members of the Senate Budget Committee, said they have agreed to a tentative deal to craft a budget that would allow “headroom” for a significant tax cut, though they didn’t specify the size of the reduction.

Canada:

• Manufacturing sales in July fell 2.6% from a month ago, accelerating from June’s 1.9% drop; analysts had anticipated a 1.9% decline. July’s decline marked its fastest in more than a year as extended automobile plant shutdowns triggered the biggest drop in transportation production since the country’s last recession.
• Canada’s government recorded a C$17.8 billion shortfall in its first full fiscal year, beating Finance Minister Bill Morneau’s most recent budget projections by C$5.3 billion on lower-than-expected program spending and higher revenue, data released Tuesday show.

UK:

• As the pound surges on mounting expectations of a U.K. interest-rate rise, and British politicians wrangle over Brexit strategy, a Blomberg report noted that UK equities are missing out on a global stock rally and could be in for more pain due to its strong exposure to commodities and emerging economies, citing JPMorgan Chase & Co.
   

Japan:

• Markets are suggesting that any snap election called by Japanese Prime Minister Shinzo Abe would take advantage of his opponents’ weakness and see him retain power. A victory would ensure the continuation of Abenomics, the recipe of mega monetary easing, flexible fiscal policy and selective deregulation that’s helped Japan’s economy to its longest sustained expansion since before the global crisis.
• Japanese exports and imports surged in August, with both beating expectations as a recovery in trade appeared to gain momentum. Exports jumped 18.1% year-on-year, accelerating upon July’s 13.4% gain and surpassing the median estimate of 14.3%. Imports increased 15.2% over the same period, beating the consensus forecast of 11.6%.

China:

• The Treasury Department said late Monday that China’s holdings of US government debt rose $107.6 billion through the first 7 months of the year, already making 2017 the biggest year for purchases by the Asian nation since its holdings expanded by $265.3 billion in 2010. China in June regained its position as the largest foreign holder of US Treasuries, supplanting Japan, which held the spot for 8 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 held above its key $1,300/Oz support, paring some of its previous session’s decline to rise 0.4% to $1,313.02/Oz earlier today. The precious metal is likely to have been buoyed following Trump’s comments to “annihilate” North Korea in his UN speech yesterday.
• The precious metal should be supported at its key $1,300/Oz level for the time being, although more-hawkish than expected comments at the Fed’s press conference later today 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 pared recent declines as well, regaining 1.0% from a 3-week low, to $17.3369/Oz earlier.

Oil

• Crude oil futures erased an overnight 0.9% decline earlier today, to gain back close to the $50/bbl handle on signs the pace of US stockpiles gains is slowing as refiners resume operations after Hurricane Harvey, boosting crude demand.
• Futures had earlier climbed by as much as 0.8% after the American Petroleum Institute was said to report inventories expanded by 1.4 million barrels last week, less than half the projected 3.9-million barrel increased the government is forecast to report tonight.
• Iraq, the second-largest OPEC producer, said output should be cut by an additional 1% to help rebalance the market.

Renewable Energy:

• According to a Bloomberg report, the cost of renewable energy production is plunging faster than forecasters anticipated just a few years ago as technologies like gigantic wind turbines arrive on the market. According to the news piece, technology that’s slashing the costs of wind and solar farms makes it inevitable that clean energy will become more economical than fossil fuels for utilities in many places. The most visible advance is in the scale of wind turbines, highlighted by the chart below.
  
• According to Bloomberg New Energy Finance forecasts, it will eventually be more costly to operate existing coal and gas plants than to take power from wind and solar. The chart below indicates that point may arrive in the middle of the next decade in both Germany and China.
  

USDSGD:

• Spot 1.3464
• USDSGD reversed Tuesday’s advance, falling back from the 1.3500 to decline 0.2% to 1.3456 earlier.
• The resistance remains around the recent high of 1.3539, while the key support below lies at 1.3350.

AUDUSD:

• Spot 0.8016
• AUDUSD rebounded from a 2-week low yesterday, and gained by as much as 0.3% to 0.8022 earlier as traders await the FOMC tonight.
• Further strength in the Australian dollar may be capped, with iron ore prices continuing to weaken. A retreat back to 0.7800 is possible.

USDCAD:

• Spot 1.2281
• USDCAD was unchanged on the day earlier following its 0.7% rebound on Tuesday 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 6.5700
• The PBOC weakened its reference rate earlier today by 0.21%, to 6.5670 per US dollar.
• USDCNH erased yesterday’s advance, slipping 0.3% to 6.5667 this morning.
• According to the state-run China Securities Journal, the yuan may keep appreciating as investors will sell their foreign exchange holdings, but fast appreciation is unlikely.
• 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 lingered near a 6-week high earlier today ahead of the FOMC meeting conclusion later today. The pair had gained for 7 consecutive sessions, breaking above the 111 resistance in the process.
• 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 1.3518
• GBPUSD pared a 2-day retreat earlier today, rising 0.3% to 1.3537 ahead of the FOMC meeting and UK retail sales data due later today.
• Despite some less-hawkish comments by Governor Carney on Monday, 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.