Issue#: 535/2019

Spot values at a glance:

USD/SGD

USD/CNH

AUD/USD

USD/JPY

USD/CAD

GBP/USD

Daily Observations:

Asian stocks were mixed in thin trading Tuesday as investors awaited to see if Chinese and American officials can schedule a planned meeting this month to continue trade talks. Treasury yields ticked higher and the dollar strengthened. Shares saw modest gains in Tokyo and fluctuated in Hong Kong, Sydney and Shanghai. US futures pared a drop. The pound added to losses with the UK facing a showdown in Parliament over delaying Brexit again.

 

US-China Trade Talks Remain Uncertain:

Chinese and US officials are struggling to agree on the schedule for a planned meeting this month to continue trade talks after Washington rejected Beijing’s request to delay tariffs that took effect over the weekend, according to people familiar with the discussions.

Despite efforts by President Donald Trump to soothe financial markets and portray the talks as making progress, the world’s two biggest economic powers have yet to agree on basic terms of re-engagement, with mistrust on both sides.

The date for a visit of Chinese officials to the US capital hasn’t been set, though that’s not necessarily a sign it still won’t happen, said the people, who asked not to be identified because the discussions are private. US equity futures fell on the news, touching their lows for the day.

In conversations over the past week, the 2 sides have failed to agree on at least 2 requests, an American appeal to set some parameters for the next round of talks and a Chinese call to delay new tariffs, 2 of the people said. Trump went ahead anyway with tariffs on Sunday, doubling down on a strategy that seems to be having the opposite of the desired effect.

Chinese state media reacted by signaling the government is ready to weather the economic turbulence. Beijing then said it planned to file a complaint at the World Trade Organization against the US tariffs under the dispute settlement process, according to a Ministry of Commerce statement late Monday.

The new 15% US duty on about $112 billion of Chinese products will hit Americans more directly than an existing 25% tax on about $250 billion of goods, targeting consumer staples and technology products. A separate batch of about $160 billion in Chinese goods will be hit with 15% tariffs on Dec. 15.

China’s export-driven economy is more exposed to the trade war than the US, and the toll tariffs are taking is increasingly evident. The nation’s manufacturing purchasing managers’ index dropped to 49.5, according to data released Saturday by the National Bureau of Statistics, with sub-gauges showing that domestic and new overseas orders contracted.

 

Brexit Political Mire Deepens:

Prime Minister Boris Johnson put the UK on notice that it may face an election within weeks, as the political crisis engulfing the country’s divorce from the EU deepens. Johnson will try to trigger a snap general election on Oct. 14 if he loses a crunch vote in Parliament this week, when his opponents will try to force him to delay Brexit, according to a senior official in his government.

Members of parliament who fear the effects of leaving the EU without a deal will try to take control of parliamentary business on Tuesday, a step toward trying to force Johnson to seek an extension to negotiations in the event of no agreement. Johnson says that would destroy his strategy of threatening to walk away from talks if the EU won’t give him what he wants.

The new menace reflects both Johnson’s do-or-die approach to getting Britain out of the EU by Oct. 31, but also the failure of his previous attempts to stop Parliament from tying his hands. Last week he asked the Queen to stop Parliament from meeting for a month. That galvanized his opponents, who realized they had little time to act, so over the weekend the government warned potential rebels in his Conservative Party that they’d be expelled if they voted against Johnson. That too seems to have failed.

 

HK Chief Carrie Lam in Quitting Admission:

Hong Kong Chief Executive Carrie Lam has been taped telling business leaders last week that she wants to quit her post and now has “very limited” room to resolve the crisis engulfing the city and pressuring China, according to a Reuters report. “If I have a choice,” Lam was cited as saying in English, “the first thing is to quit, having made a deep apology,” according to an audio recording of remarks made at a closed-door meeting with business representatives last week and obtained by Reuters.

Lam added that she had few options to resolve the crisis as the issue has been elevated “to a sort of sovereignty and security level, let alone in the midst of this sort of unprecedented tension between the two big economies in the world,” the news service said. A Lam spokesman declined to comment on her remarks cited by Reuters.

Hong Kong authorities are appealing for calm in the Asian financial center while warning that radical protesters showed “signs of terror” over the weekend in some of the most violent confrontations since unrest broke out three months ago. In the audio recording, Lam said Beijing hadn’t imposed a deadline for ending the crisis ahead of National Day celebrations on Oct. 1. She said China has no plans to deploy the People’s Liberation Army on Hong Kong’s streets, amid concern it could lead to a military crackdown. “They know that the price would be too huge to pay,” she said, adding “they care about the country’s international profile.”

Lam also acknowledged her own role in the crisis, which started when her government attempted to introduce a now-shelved extradition bill. It was her initiative, she said, not Beijing’s, and her government wasn’t sensitive enough to grasp “this huge degree of fear and anxiety amongst people of Hong Kong vis-à-vis the mainland of China.”

 

RBA Holds Rate at Record-Low 1%:

Australia’s central bank left policy unchanged as it waits to see how a combination of interest-rate cuts and tax relief impact the economy, with Sydney property prices already showing renewed strength.

Governor Philip Lowe kept the cash rate at a record-low 1%, as widely expected, to gauge if the economy is entering the “gentle turn” he predicted last month. Markets and economists still expect him to have to ease again later this year as the US-China conflict reverberates across the world.

“It is reasonable to expect that an extended period of low interest rates will be required in Australia,” Lowe said in his post-meeting statement. “The board will continue to monitor developments, including in the labor market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

The Reserve Bank is hoping that recent tax cuts for households revive consumption, and a weakening currency lifts exporters and helps shield the economy from global upheaval. Yet with the country’s biggest exports, iron ore and coal, tumbling and Australians grappling with record debt and weak wage growth, it will likely prove tough to avoid further rate cuts.

Easier policy is already boosting the usual suspects: national house prices rose the most in almost 2 1/2-years in August, with the two biggest cities leading the way: Sydney jumped 1.6% last month, while Melbourne climbed 1.4%.

Lowe cut rates in June and July to try to counter the global turmoil and slowing local growth, with the economy forecast to have expanded an anemic annual 1.4% in the second quarter, half its speed limit. The government meanwhile has begun providing tax rebates promised ahead of May’s election that are now reaching Australians’ bank accounts.

 

Australia Posts First Current Account Surplus in 44 Years:

Australia recorded its first current-account surplus since 1975 in the 3 months through June, underpinned by a surge in iron ore prices that have since retraced much of their gain. The windfall was A$5.9 billion in the second quarter, compared with a revised A$1.1 billion shortfall 3 months earlier, the statistics bureau said in Sydney Tuesday. Economists had forecast a A$1.5 billion surplus.

The result is mainly a function of the extraordinary and unexpected spike in iron-ore prices, fueled by huge supply disruptions and record Chinese steel production. Though both of these have since unwound, with iron ore falling the most on record in August, suggesting the surplus may not last too long.

For the RBA, a current-account surplus may not be what it needs in 2019. A surplus suggests the currency might be a bit stronger than it otherwise would be and investment somewhat softer.

The central bank has been urging the government to step up activity: infrastructure spending, productivity-enhancing reforms and other measures to stoke economic growth. But the fiscal authorities have proved reluctant, highlighting instead its tax cuts, though the bulk of these only kick in strongly midway through next decade.

 

Main Chinese Developers Downsizing:

According to a Bloomberg news report, there are increasing signs that times are getting tougher in the real estate sector in China. All 3 of the country’s biggest residential property firms reported a drop in the number of full-time employees in their first-half results, the first simultaneous downsizing since 2015, Bloomberg calculations showed.

 

Real estate companies in the world’s most-populous nation are facing a triple whammy of increased home-buying curbs, a more stringent credit environment and a slowing economy. China Evergrande Group last week reported its biggest profit slump in a decade as debt levels surged, even though its president has expressed his confidence the company can meet its 2019 contract sales target.

Country Garden Holdings Co., which employs about the same number of people as Apple Inc., recorded a drop of 11% in the first 6 months of the year, or around 15,000 staff. Full-time employees at Evergrande, which has been expanding into electric-vehicle production, shrank by around 3,000, reversing an almost three-year-long expansion.

 

 

Indonesia’s Nickel Ban Ignites Rally:

Nickel extended a powerful rally, hitting the highest since 2014, after Indonesia announced a ban on ore exports from the start of next year, tightening the market and spurring speculation there will be a deficit. Officials in Jakarta reaffirmed the plan at a briefing on Monday.

Nickel is this year’s best base metal performer as others including copper have been hurt by the U.S.-China trade war. Indonesia’s Energy and Mineral Resources Ministry said Friday ore shipments will be halted from the end of December, bringing forward a ban that had been slated for 2022. The move, which the energy and mineral resources ministry confirmed Monday, is meant to drive the development of the nation’s processing industry.

The shift will cause a shortfall of about 100,000 tons of contained metal in nickel pig iron in China in 2020, or 11% of demand, according to Shanghai Metals Market, referring to the main form used in stainless steel. Other major suppliers including the Philippines will not able to make up the loss, it said.

 

 

Sources: Bloomberg

FX Updates:

USD/SGD:

Spot: 1.3937

USDSGD reaffirmed the break above its key 1.3900 handle earlier today, as the pair soared to its highest level in more than 2 years, ahead of Singapore’s manufacturing PMI for August, which is expected to fall from its 49.8 reading in July. The psychological 1.4000 level is the next resistance area to be tested.

 

AUD/USD

Spot: 0.6707

AUDUSD rebounded back above 0.6700 earlier after the RBA left its key target unchanged, which was widely expected. The rebound could be short-lived though, as continuing trade war tensions and a weaker iron ore outlook are both likely to weigh on the Australian dollar. The bias remains to the downside.

 

USD/CAD:

Spot: 1.3345

USDCAD gained earlier today to extend its break above the 200-day moving average, and looks likely to test 1.3400 over the coming week. The Bank of Canada is expected to keep policy rate unchanged this week, so that could limit further Canadian dollar weakness, although Goldman Sachs has recently recommended shorting the Canadian dollar, citing its expectations that the Bank of Canada could join other central banks in a dovish shift.

 

USD/CNH:

Spot: 7.1878

USDCNH continued to linger near all-time highs, just below its 7.2000 handle, as the US and China struggle to set a date for planned trade talk this month. The PBOC has kept its daily yuan fixing stronger than 7.1000 per USD in an apparent effort to stabilize the yuan. till, traders have been sending the onshore yuan to new lows amid fragile sentiment, forcing it to close weaker than the daily reference rate for all but one session over the past month. Analysts predict more weakening as the US-China trade war simmers, with Bank of America Merrill Lynch expecting the exchange rate to hit 7.5000 per dollar by year end.

 

USD/JPY:

Spot: 106.29

USDJPY continues to fluctuate around the 106 level, after recovering from an almost-3 year low of 104.46 last week. A strong clean break below 104.50 could trigger a rapid move back towards 100. Ongoing fears of a global slowdown, trade disputes and volatile markets continue to spur demand for safe haven assets such as the yen.

 

GBP/USD:

Spot: 1.2031

GBPUSD looks set to seriously test 1.2000 over the short term, with no Brexit solution in sight ahead of the much-awaited resumption of the British Parliament. In addition to the early-day headlines suggesting the Brexit negotiator’s dislike for the EU’s refrain from altering Irish backstop, as conveyed by the BBC and the UK Telegraph, the Cable bears the burden of overall USD strength as the US traders will return to their desks after an extended weekend. 1.1841, the low last attained in 2016, is the last line of support below 1.2000.

 

   

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