September 5, 2017

Daily Observations:

Asian equities were mixed, with declines in Tokyo, Seoul and Sydney, and gains in Shanghai, Hong Kong and Singapore, as traders awaited further developments on the North Korea front. Gold held near an 11-month high, while the yen slipped further below the 110 handle.

Geopolitics:

• North Korea is “begging for war” by testing a nuclear weapon, said US ambassador to the UN Nikki Haley on Monday in a push for harsher sanctions against Kim Jong Un’s regime. Shutting down China’s oil exports to the unruly agitator next door are in focus as a way to bring North Korea to heel, though Beijing is unlikely to agree to take such a dramatic step after describing Trump’s threat to cut off all trade with nations that do business with North Korea as unfair.
• In a telephone call, US President Donald Trump and South Korean President Moon Jae-in “agreed to maximize pressure” on North Korea. Moon’s government acceded to a temporary full deployment of a missile defense system and warned that its neighbors’ actions will damage financial markets as well as the real economy.
• Trump has also “provided his conceptual approval” for South Korea to buy “many billions of dollars’ worth of military weapons and equipment” from the US, according to a statement from the White House.
• South Korea’s Chang Kyung-soo, acting chief of the Defense Ministry’s policy planning office, said on Monday that his country’s northern neighbor is preparing for a possible intercontinental ballistic missile launch.

US:

• The House of Representatives will vote Wednesday on a Hurricane Harvey relief bill that won’t contain language aimed at staving off a US default on its debt. Republican leaders for now are bowing to the demands of their most conservative members and won’t combine legislation raising the US debt ceiling with Harvey aid, a House Republican aide said Monday. Treasury Secretary Steven Mnuchin said on Fox News Sunday that the 2 issues should be combined. Mnuchin has said the debt limit must be raised by Sept. 29 in order to avoid a market-shaking default.
• US markets were closed on Monday for Labor Day, although S&P 500 Index futures traded to the downside.
• The US dollar declined as investors sought other safe haven currencies such as the yen and the Swiss franc. The Bloomberg Dollar Spot Index was 0.1% lower earlier this morning, while the Dollar Index shed 0.1 % to 92.545.
• The benchmark 10yr Treasury yield slipped 3bps to 2.14% earlier today.

Canada:

• The latest round of NAFTA talks is nearing its conclusion without any major breakthroughs or agreements on even the least-contentious topics, officials familiar with the negotiations say, fuelling doubts among observers that a deal can be reached this year. While negotiators have now initially addressed all major topics and made some progress, they have yet to agree on any major contentious issue and the 3 countries are far from a deal on any individual NAFTA chapter, officials said.

Europe:

• European Producer prices in July failed to gain from a month ago and rose 2.0% from a year before, missing median estimates of 0.1% and 2.1% respectively.

UK:

• The Markit UK Construction PMI for August fell to 51.1, from 51.9 in July, faring worse than the predicted 51.0 reading.
• Retail sales climbed in August at the fastest rate since Easter, with the like-for-like gain increasing to 1.3% from a year earlier, the British Retail Consortium and KPMG said Tuesday. While that’s the third consecutive month of rising sales, growth has been mainly driven by higher food prices rather than because shoppers are buying more goods, according to the BRC. Purchases of non-food items picked up in the 3 months to August after a spell of weakness.

China:

• The Caixin PMI Composite rose to 52.4, from 51.9 in July. Services PMI increased from 51.5 to 52.7 last month. No estimates were provided.

Japan:

• The Nikkei PMI for services slipped to 51.6 in August, down from 52.0 in July.

Singapore:

• The PMI in August gained to 51.8, from 51.0 in July, surpassing the consensus forecast of 51.2. The electronics sector index advanced too, from 52.2 to 53.2.

Precious Metals:

• Spot gold maintained near an 11-month high, remaining supported above the $1,330/Oz handle as US President Trump agreed to support billions of dollars in new weapon sales to South Korea, following North Korea’s nuclear test.
• Having broken above its key $1,300/Oz level last week, thus confirming its breakout of its multiyear downtrend, the bias has now shifted strongly to the upside for the yellow metal with the next resistance target coming in at $1,375/Oz.
• According to executive chairman at Templeton Emerging Markets Group Mark Mobius, governments will begin clamping down on digital currencies because of their use in illicit financing, which will thus in turn lead to “a reversion back to gold” as the main choice of a safe haven asset.
• Silver for immediate delivery edged higher by 0.2% to $17.8783/Oz earlier; its next major resistance comes in at $18.6530/Oz.

Oil

• Crude oil futures gained 0.8% to $47.65/bbl earlier today, as refiners continued their recovery form the devastation of Hurricane Harvey. However, the market is now closely watching as another major hurricane, Irma, moves across the Atlantic towards the Caribbean.
• Saudi Arabia raised oil pricing for October sales to Asia, increasing its lighter grades for a second consecutive month, in an indication the world’s largest crude exporter sees strengthening demand in it is biggest market.

Cryptocurrencies:

• Bitcoin tumbled the most since July after China’s central bank said initial coin offerings are illegal and asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales.
• The PBOC said on its website Monday that it had completed investigations into ICOs, and will strictly punish offerings in the future while penalizing legal violations in ones already completed. The regulator said that those who have already raised money must provide refunds, though it didn’t specify how the money would be paid back to investors.

USDSGD:

• Spot 1.3552
• USDSGD declined 0.2% to 1.3545, on the back of a US dollar weakness earlier today.
• The currency pair is likely to meet some resistance at around the 1.3600 handle. However the major resistance level comes in at 1.3700. A breakout above the latter could signal a reversal in currency pair’s downtrend channel, formed since the start of the year.
• The major support remains around the 1.3350 region.

AUDUSD:

• Spot 0.7962
• AUDUSD pared an earlier session rally and is currently unchanged on the day, ahead of the RBA’s cash rate decision due after midday SGT.
• Officials are expected to leave rates unchanged at record lows amid slumping consumer confidence and a buoyant currency, which continues to trade between its 0.7900- 0.8000 range.

USDCAD:

• Spot 1.2398
• USDCAD pared Monday’s gain, slipping 0.2% back below the 1.2400 handle. The Canadian dollar has recently been buoyed by better-than-expected economic data, as well as speculation that a rehashing of NAFTA may not be completed by this year.
• A convincing break below the 1.2400 handle may lead to a retest of the psychological support at 1.2000.

USDCNH:

• Spot 6.5483
• The PBOC strengthened its reference rate by 0.45% to 6.5370 per US dollar earlier today.
• USDCNH rebounded from its lowest level in almost 15 months, gaining 0.3% to 6.5510.
• OCBC economist Tommy Xie says the currency may be supported not only by a widening yield differential with the US but also by safe-haven inflows as China is the world’s second-largest net creditor.

USDJPY:

• Spot 109.24
• USDJPY erased Tuesday’s advance, falling earlier today by as much as 0.5% to 109.21 amid continued geopolitical concerns stemming from the Korean peninsula.
• The 1-month resistance level around 111 is likely to cap future gains, but on a longer term basis, 115 represents a more significant level.
• The key support remains at the 108 handle, last tested in April. The pair has largely ranged between 109 and 115 for most part of the last 5 months. A breakout in either direction could lead to a sustained move that could last until the end of the year.

GBPUSD:

• Spot 1.2932
• GBPUSD pared some of Friday’s rally, falling 0.3% to 1.2913 last night after a gauge of UK construction growth unexpectedly slowed to the weakest in a year last month.
• The pound has, over the past month, been hampered by a lack of progress in Brexit negotiations between the UK and the EU. The third round ended in stalemate last week, spurring doubts that the two sides would be ready to discuss a trade deal any time soon.  Markets will keep an eye on politics with the UK House of Commons reconvening yesterday after its summer recess.
• The 2-month low of 1.2775 looks to provide near term support.