September 21, 2017

Daily Observations:

The yen declined and the dollar extended gains against major peers as the US Federal Reserve and the Bank of Japan announced diverging monetary policies. The Fed set an October start for shrinking its balance sheet and maintained a forecast for another rate increase this year, while the BOJ kept its monetary stimulus unchanged. The US 10yr Treasury yield approached 2.30%. Oil held above $50/bbl, gold retreated and base metals tumbled.

Geopolitics:

• Japanese Prime Minister Shinzo Abe stepped up his rhetoric against North Korea in a speech to the United Nations, saying Kim Jong Un was getting away with worse behavior than any dictator since the end of the Cold War. Abe called for pressure on the regime, rather than talks, and again backed US President Donald Trump’s vow to keep all options on the table for dealing with Pyongyang.

US:

• The Federal Reserve announced it will begin reducing its balance sheet, which swelled to $4.5 trillion amid unconventional measures deployed following the financial crisis, in October. Officials believe the hurricanes that have battered parts of the US will have a temporary effect on activity. The dot plot showed that most policymakers believe it will be appropriate to hike rates again this year, with only 4 officials wanting to maintain the current policy rate through year-end, the same number as in June.
• As expected, policy makers unanimously left the benchmark interest rate unchanged in a range of 1% to 1.25%. The Fed reiterated that interest rates are likely to rise at a “gradual” pace and that three quarter-point rate hikes would be appropriate next year, based on the dot plot of rate forecasts.
• Chair Janet Yellen called this year’s inflation undershoot a “mystery”. While the storms will temporarily boost inflation thanks to higher prices for gasoline and other items, “apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2% in the near term but to stabilize around the committee’s 2% objective over the medium term,” the Fed said.
• The Fed said the balance-sheet runoff would follow the framework released in June: $6 billion in Treasuries and $4 billion in mortgage-backed securities per month, rising every 3 months until the amounts reach $30 billion and $20 billion per month, respectively. The Fed anticipates ending the runoff at some point, though it doesn’t yet have a specific date.
• Following a more hawkish tone from Fed Chair Yellen last night, the odds of another hike by year-end rose to 64%, based on pricing data on Bloomberg. Treasury yields rose, with the benchmark 10yr Treasury yield rising 3bps to 2.27% in New York; the 10yr yield has risen in all but one of the past 9 sessions.
• The US dollar rallied; the Bloomberg Dollar Index ended 0.5% higher while the Dollar Index jumped 0.8% to blow past the 92 handle though it fell short of closing above last week’s high of 92.661.
• The S&P 500 Index and Dow Jones Industrial Average reversed earlier-session losses to end at fresh record highs as bank stocks rallied. The Nasdaq Composite faltered slightly, falling 0.08%. Shares of Apple suffered their worst drop in more than a month after Rosenblatt Securites analyst Jun Zhang said demand for the iPhone 8 is “substantially lower” than for the previous 2 models.

UK:

• Retail sales in August surpassed expectations; excluding the effects of fuel, retail sales gained 1.0% month-on-month and 2.8% year-on-year, comfortably beating their respective estimates of 0.1% and 1.4%.

Japan:

• The Bank of Japan kept its monetary policy unchanged earlier today, but a new board member opposed the decision in his first meeting, an unexpected sign of dissension on a board chosen entirely by Prime Minister Abe.
• The BOJ left its target interest rates and asset purchase program unchanged, as expected, as economists increasingly expect the central bank to stay the course at least through the end of Kuroda’s current term in April, even as the balance sheet nears the size of Japan’s economy.

China:

• The Treasury Department said earlier this week 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.

Precious Metals:

• Spot gold sold off following Yellen’s more-hawkish than expected comments. The precious metal fell 1.5% to $1,295.89/Oz earlier and is in danger of breaking back below the key support of $1,300/Oz.
• A fall below $1,300/Oz, and the support around $1,265/Oz is next to be tested. The latter it’s the 50% retracement level following the rally from mid-July to mid-September.
• Silver for immediate delivery slumped to a 1-month low, sliding 2.3% to $16.9713/Oz.

Oil

• Crude oil futures rose 1.6% to close above $50/bbl for the first time since July. The weekly report from the Energy Information Administration showed that US stockpiles of gasoline hit a 22-month low, suggesting that refiners need to crank up their crude processing.
• A tight physical market for crude has seen one of the world’s largest storage facilities, located in Africa, bleed inventories amid firm demand. Representatives from OPEC and other major producers are meeting in Vienna this week to discuss the state of the oil market and assess the need for an extension of their deal to curb output or deeper production cuts, though no conclusive update on that front is expected until November. In August, parties showed a more than perfect record of compliance to the agreement, according to some delegates.
• Meanwhile, the upcoming referendum on Kurdish independence may cause a deterioration in the oil-rich region’s relationship with neighboring Turkey.

Cybersecurity:

• The vulnerability of governments and businesses to cyberattacks was exposed again Wednesday when a top US financial regulator said hackers had breached its electronic database of market-moving corporate announcements in 2016, and may have profited from the information they stole through the use of illicit trades.

USDSGD:

• Spot 1.3516
• USDSGD rose to 2-week highs on the back of a strengthening US dollar earlier, gaining 0.7% to 1.3529.
• The main trend since the start of the year remains to the downside, although a break above the key resistance around the 1.3600 could indicate a reversal is on the cards.
  
• The immediate resistance remains around the recent high of 1.3539, while the key support below lies at 1.3350.

AUDUSD:

• Spot 0.7973
• AUDUSD retreated from the 0.8100 handle yesterday, falling 1.0% to slide back below the 0.8000 handle today.
• 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 1.2346
• USDCAD rose sharply after the FOMC boosted by a rally of the USD across the board. The pair gained by as much as 1.1% to a 3-week high of 1.2390, before paring back some of its gain due to strengthening crude oil prices..
• The first point of resistance is likely to come in at the 1.2400 handle.

USDCNH:

• Spot 6.5929
• The PBOC weakened its reference rate earlier today by 0.30%, to 6.5867 per US dollar.
• USDCNH gained 0.4% to a 3-week high of 6.6042 earlier today as the Fed signalled it will raise rates again this year, bolstering the US dollar.
• Dollar strength is adding pressure to the yuan, which has fallen 2.4% from its Sep. 8 high after the PBOC made it cheaper to bet against the exchange rate.

USDJPY:

• Spot 112.44
• USDJPY rose 1.3% to 112.65, a 2-month high, on the back of more-hawkish than anticipated comments from the Fed last night, although the pair has since pared some of its gain following the BOJ policy decision moments earlier.
• The main resistance lies at the 6-month high of 114.48.

GBPUSD:

• Spot 1.3487
• GBPUSD reversed from a post-Brexit high of 1.3657, falling 0.6% to 1.3453 after the Fed gave dollar bulls something to lean on last night.
• 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.