Tue, Aug 21, 2018 @ 06:08 GMT

RBA minutes: El Niño risks increased, no strong case for a near term rate move

    Minutes of August RBA meeting noted that drought conditions affected the timing of crop harvest. And the “probability of an El Niño event, which would typically be associated with low rainfall in eastern Australia, had increased over 2018″. That implies ” downside risks to the forecasts for farm output and exports.”

    Otherwise, the minutes came in basically as expected. They noted that global economic expansion continued but “direction of international trade policy in the United States continued to be a source of uncertainty for the global outlook.”

    Australian Dollar had “depreciated a little” against the US dollar. However, “in trade-weighted terms it had remained within its trading range of the previous two years.”

    Domestic forecasts were largely unchanged. GDP is projected to be a little above 3% over 2018 and 2019. Inflation would dip “temporarily” in September quarter due to some administered prices. But it’s expected to be at around 2.25% in 2020.

    On interest rates, the next move “would more likely be an increase than a decrease”. But there was “no strong case for a near-term adjustment”.

    Full minutes here.

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    Former top treasury official blasts Trump as woefully wide of the mark on Yuan manipulation

      Mark Sobel, a former top US Treasury Official criticized Trump’s remark regarding Chinese currency manipulation as “woefully wide of the mark”. And, Trump’s focus on bilateral balances as “silly”. And, to suspect a country of currency manipulation, there are criteria of “material ‘excessive’ current account surplus, an undervalued currency, and ample and rising reserves”.

      In an article titled “Trump wide of mark on ‘manipulation‘”, Sobel point to facts that “China’s current account surplus is falling to under 1% of GDP. The renminbi, hit by capital outflows between early 2015 and the end of 2016, rose sharply against the dollar up to April 2018. The renminbi trade-weighted index rose too. Since then, the renminbi has fallen on both measures, but the depreciation reflects the dollar’s strength across the board. There is little evidence of more than scant Chinese foreign exchange market intervention.”

      He noted “a currency manipulating country should have a significant current account surplus”. And, “the US Treasury in its foreign exchange reports uses a 3% of GDP threshold.” While a currency manipulating country might also have an “undervalued currency” one should “look at a country’s real effective exchange rate, not its bilateral dollar rate.” Additionally, the country may intervene heavily in the markets, “buying dollars to hold its currency down, resulting in an increase in its foreign reserve holdings.” But there might be “good reasons” to do so such as building up of reserves. There are many useful gauges of reserve adequacy to examine – reserves/GDP; reserves/short-term maturing debt; reserves/imports.

      Sobel also completed that “a focus on bilateral balances is silly, even if the US Treasury is required to do so by statute and the president seems obsessed with them. Such an emphasis neglects to consider that certain countries specialize in certain goods and hold comparative advantage in such spheres.”

      Mark Sobel is US Chairman of OMFIF. He is a former Deputy Assistant Secretary for International Monetary and Financial Policy at the US Treasury and until earlier this year US representative at the International Monetary Fund.

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      Trump didn’t anticipate much from this week’s US-China trade talk

        On trade dispute with China, Trump said he had “no time frame” for ending it. While the Chinese delegation is arriving the US soon, Trump said he did not “anticipate much” from the discussions.

        He emphasized that the resolution will “take time” because “China’s done too well for too long, and they’ve become spoiled. They dealt with people that, frankly, didn’t know what they were doing, to allow us to get into this position.”

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        Dollar extends decline as Trump blames Fed Chair Powell for rate hikes

          Dollar stays generally weak in Asian session and extends Monday’s selloff, on Trump’s attack on Fed. In a Reuters interview, Trump reiterated his comments last month that “I’m not thrilled with his raising of interest rates, no. I’m not thrilled,” referring to Fed Chair Jerome Powell.

          He complained the the US is not getting any support from the Fed during his negotiation with other countries. Trump noted, “we’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated.”

          Trump also fingered pointed Eurozone and China for currency manipulation to give them an advantage over the US on trade. He said . “I think China’s manipulating their currency, absolutely. And I think the euro is being manipulated also.”

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          Mid-US udpate: Dollar lower as Trump criticizes Fed Powell, Gold to break 1190

            A rather boring trading day is fired up after Bloomberg reported that Trump criticized Fed’s rate hike again. And this time, he specifically complained that Fed Chair Jerome Powell is not the “cheap money” Fed chair he expected. Dollar is currently trading as the third weakest for today, just next to New Zealand Dollar and Canadian Dollar.

            And the greenback has finally got out of Friday’s range against Euro and Australian Dollar. GBP/USD extended the recovery earlier today already. On the other hand, Sterling is trading as the strongest one for today while Swiss Franc follows. But these two are rather close.

            In other markets, FTSE closed up 0.43% at 7591.26, DAX gained 0.99% to 12331.30, CAC rose 0.65% to 5379.65. At the time of writing, DOW is up 0.40% or 100 pts, S&P 500 is up 0.25%. NASDAQ is down -0.06% (that is, nearly flat). It still a bit early to tell. But S&P 500 at 2857 is rather close to 2872.87 record high, which the index may challenge later in the week. 10 year yield extends recent decline and is down -0.04 at 2.833.

            Gold is finally having some momentum for extending last week’s rebound from 1160.37 low. And, 1190 is within touching distance. Eyes, will be on 1200. Nonetheless, break of 1211.65 support turned resistance is needed to indicate short term bottoming. Or, outlook will remain bearish, in spite of the current rebound.

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            Trump lamented Fed chair Powell for rate hikes

              Another factor that pressures the greenback is Trump again criticized the person he chose as Fed chair, Jerome Powell.

              The occasion was a fund raiser at the Hamptons on Friday. Bloomberg reported that Trump said he expected Jerome Powell to be a “cheap-money” Fed chairman and lamented that his nominee instead raised interest rates.

              Just a month ago, Trump already verbally intervened by saying in a CNBC interview that he was unhappy with Fed’s rate hikes. And that a strong dollar is disadvantageous to the US.

              Anyway, if Trump did have that expectation and Powell turned out to be not what he expected, it’s obvious that Trump is blind. Powell has been consistent with who he is, till now,  since taking up the job as Fed Governor.

              Also, there is a voting system in Fed. Being cheap-money or not, Powell only has one vote. Or, a dictator forgot this simple fact? Or is Trump just scapegoating a single person again?

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              Fed Bostic pledges not to vote for anything that knowingly inverts yield curve

                Atlanta Fed President Raphael Bostic’s comments seem to be a factor that’s weighing down Dollar slightly in a slow market today.

                Bostic said that Fed is doing well on inflation now, and the economy doesn’t need as much stimulus as it had before. Also, GDP is strong and unemployment is “very, very low” historically”. This part seems to be a bit hawkish.

                However, Bostic also warned that yield curve is currently “extremely flat” and fed has concerns over the flatness. He went further to emphasize that he won’t vote for anything that knowingly inverts yield curve.

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                Into US session: Sterling higher in quiet trading, Kiwi weak

                  Entering into US session, Sterling catches a bid and is trading as the strongest one for today so far. Swiss Franc follows as the second strongest, then Dollar. On the other hand, New Zealand Dollar is the worst performing one, followed by Euro and than Australian Dollar. Though most of the pairs are bounded in Friday’s range, with the exception of GBP/USD and EUR/AUD only.

                  In other markets, European indices are generally higher today, with DAX leading the way up 0.96% at the time of writing. CAC is up 0.62% while FTSE is up 0.33%. 10 year German bund yield trades nearly flat today, up 0.005 at 0.311. Italian 10 year yield eased back, down -0.047 at 3.075.

                  In Asia, Nikkei closed down -0.32% while Singapore Strait Times lost -0.15%. But China Shanghai SSE rose 1.1% to 2698.47, can’t get hold of 2700. Hong Kong HSI rose 1.41%. 10 year JGB yield rose 0.0001 to 0.095.

                  The economic calendar is rather empty today. Main features are speeches of BoC Governing Council member Wilkins, Fed Bostic and Bundesbank head Weidmann.

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                  Greece completes three year bailout program, begins a new chapter

                    European Commission formally announced the conclusion of the three-year stability support program for Greece and “a new chapter” begins. In the statement, EC hailed that “The successful conclusion of the programme is a testament to the efforts of the Greek people, the country’s commitment to reform, and the solidarity of its European partners.”

                    European Commission President Jean-Claude Juncker said: “The conclusion of the stability support programme marks an important moment for Greece and Europe. While their European partners have demonstrated their solidarity, the Greek people have responded to every challenge with a characteristic courage and determination. I have always fought for Greece to remain at the heart of Europe. As the Greek people begin a new chapter in their storied history, they will always find in me an ally, a partner and a friend.”

                    Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “The conclusion of the stability support programme is good news for both Greece and the euro area. For Greece and its people, it marks the beginning of a new chapter after eight particularly difficult years. For the euro area, it draws a symbolic line under an existential crisis. The extensive reforms Greece has carried out have laid the ground for a sustainable recovery: this must be nurtured and maintained to enable the Greek people to reap the benefits of their efforts and sacrifices. Europe will continue to stand by Greece’s side.”

                    Full statement here.

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                    Bundesbank: German growth on sound path, private consumption as linchpin

                      German Bundesbank noted in the latest monthly report that “economic boom in Germany was still ongoing”. In Q2, private consumption “continued its ascent” and was the “linchpin of economic growth”. Government consumption also rose “significantly”. Exports grew “moderately” following a drop at the start of the year.

                      Bundesbank expected the economy to “remain on a sound growth path” in Q3 even though the pace could slow from H1. Industry is not expected to make any meaningful contribution to aggregate growth. On the other hand, private consumption remains a key growth driver due to “excellent labour market situation and the current strong wage hikes”

                      For Eurozone, “the unabatedly positive sentiment among businesses and consumers suggests that the economic upturn in the euro area will continue”.

                      Full release here.

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                      EU Moscovici: It’s not necessarily a Brexit deal between UK and EU

                        European Commissioner for Economic and Financial Affairs Pierre Moscovici talked about Brexit in a French radio interview today.

                        Asked if there would definitely be a deal between the UK and the EU on Brexit, Moscovici said it’s “not necessarily”.

                        He also added that “in theory” the Brexit vote can be reversed. He noted “it is up to the British themselves who have made the decision to leave, to decide ultimately if they will or not, and how they will do it.”

                        But he also said that “the probability of Brexit is nevertheless very strong because there has been a vote of the people, a referendum…”

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                        Economists project 2 BoE hikes next year, we disagree

                          According to a Bloomberg survey, majority of the 31 economists surveyed expected BoE Bank Rate to reach 1.25% by the end of 2019. That is, they expected two 25bps rate hikes next year. The first move is expected to come in Q2. It’s cited that Brexit is a concern that slows BoE’s tightening path. But by the time of Q2 next year, such concerned should be cleared. Meanwhile, falling inflation could only give BoE a reason to keep rates on hold until May. With Brexit cleared, and unfolded smoothly, path will be clear for another hike in November. Some analysts also saw BoE’s unanimous votes as sign that policymakers are confident enough to act twice next year. The Bank Rate currently stands at 0.75%.

                          But it should noted that BoE has revised down the rate path in August Inflation Report released less than three weeks ago. The central bank forecast Bank Rate to hit 0.9% in Q3 2019, revised down from 1.0%. Bank Rate is forecast to be at 1.0% in Q3 2020, revised down from 1.2%.

                          Looking into the details, the conditioning path that BoE used didn’t price in a 25bps hike fully until 2020. And basically there would be no more hike within the forecast horizon. And based on such conditioning path, CPI is forecast to slow to 2.2% in Q3 2019, 2.1% in 2020. July’s pick up in CPI to 2.5% was in line with BoE’s expectations.

                          So, to us, a hike in H2 of 2019 is possible based on the current projections and developments. But a hike in Q2 2019 looks a bit stretched. And two hikes in 2019 is rather far-fetched.

                          Moreover, the unanimous vote was seen to us as a compromise between hawks and doves. That is, BoE was going to hike once this year anyway as Q1 slowdown was proven to be temporary. Let’s do it and settle, but to stay graudual and cautious going forward.

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                          UK to publish technical notices on no-deal Brexit preparations

                            UK Brexit Minister Dominic Raab will meet EU chief Brexit negotiator Michel Barnier in Brussels on Tuesday. Prime Minister Theresa May’s spokesman said that “on the agenda will be resolving the few remaining withdrawal issues related to the UK leaving the EU and pressing ahead with discussions on the future relationship.”

                            Raab said that securing a Brexit deal was still “the most likely outcome”. But at the same time, the government scheduled to push a series of technical notices for no-deal preparation. Raab added that the government would wanted to “clearly set out the steps that people, businesses and public services need to take in the unlikely event that we don’t reach an agreement” with the EU.

                            The no-deal advice will be due on Thursday and are “sensible, proportionate, and part of a common sense approach to ensure stability, whatever the outcome of talks”, according to Raab.

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                            German Finance Ministry: Turkish crisis adds to risks of Brexit and trade war

                              In its monthly report, the German Finance Ministry the “economic developments in Turkey present a new, external economic risk” to the economy. Germany is the second largest foreign investor in Turkey.

                              That adds on trop of Brexit as “risks remain particularly with regards to uncertainty over how Brexit is going to pan out”.

                              US trade policy is another main risk as “the persistent debate about tariffs and the threat of a trade war are choking trade activity.”

                              Nonetheless, despite the risks, the Minstry said the economy remains supported by state spending, private consumption, low interest rates, a robust labor market and rising real wages.

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                              AUD/JPY: A head and shoulder bottom failure in the making?

                                AUD/JPY could be a very interesting pair to watch this week. From the hourly chart, there’s clearly a beautiful head and shoulder bottom pattern (ls:79.97, h: 79.69, rs: 80.09). Bullish convergence condition is also seen in hourly MACD. So, is AUD/JPY ready for a powerful upside move?

                                We’re quite skeptical on it. First of all, we’d like to reiterate that head and shoulder is a classic “reversal” pattern. Believe nobody would disagree to that. But we’d like to clarify that meaning of “reversal”. It means both a) ending the prior trend to start a new trend in the opposite direction, OR b) halting the current trend, starting a counter trend move to correct the prior move. In case of b) the subsequent move could be in form of any corrective pattern, a rectangle, a wedge, a triangle, etc.

                                To assess the chance a) for AUD/JPY, we’ll have to see if the pair has completed a down trend that’s in a larger degree of the head and shoulder pattern. That is, we’ll have to look at the bigger picture to see if the conditions are in place for a larger reversal.

                                Firstly, AUD/JPY has just resumed the down trend from 2017 high at 90.29, by breaking 80.48 key support level, with solid downside momentum. From the daily MACD, we see that downside momentum is increasing, rather than decreasing.

                                Fall from 90.29 is either correcting the up trend from 72.39 to 90.29, or starting a new long term down trend. But even for the former case (less bearish), it hasn’t matched target of 61.8% retracement of 72.39 to 90.29 at 79.22 yet. So, we don’t think conditions are in place to reverse the trend from 90.29 yet.

                                Looking a bit closer, if the above view is correct, then fall from 83.92, which started the downside breakout, should be a five-wave sequence. Having a look at the 4 hour chart, 79.69 should be, at worst the end of the third wave from 83.92. Hence, rebound from there is not even reversing the fall from 83.92.

                                So in our view, the rebound from 79.69 is likely just a counter trend move that corrects the fall from 82.78. That is, the above mentioned case b). With that in mind, 4 hour 55 EMA (now at 80.99) is the first hurdle. But more importantly, an important cluster resistance zone lies ahead. That is, 100% projection of 76.69 to 80.82 from 80.09 at 81.22, 50% retracement of 82.78 to 79.69 at 81.23, 38.2% retracement of 83.92 to 76.69 at 81.30. We do not expect, as a corrective move, the rise from 79.69 to pass through this 81.22/30 resistance zone.

                                For head and should pattern, the target is usually calculated by adding the depth of the head to the neck line. That is, in this case, depth of the head is 80.82-79.69= 1.13. The target is thus 80.82+3.13=81.98. It’s “substantially” higher than the above mentioned 81.22/30 resistance zone. Hence, we’d believe it’s going to be a head and shoulder pattern failure.

                                As usual, we could be wrong. Let’s see.

                                Tell us your views too.

                                 

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                                U of Michigan dropped to 95.3, 11-month low, consumers have little tolerance for overshooting inflation

                                  US University of Michigan consumer sentiment dropped sharply to 95.3 in August, down from 97.9 and missed expectation of 98.1. That’s also the lowest level since last September.

                                  Some quotes from Surveys of Consumers chief economist, Richard Curtin:

                                  • Decline concentrated among households in the bottom third of the income distribution
                                  • The dominating weakness reflected much less favorable assessments of buying conditions, mainly due to less favorable perceptions of market prices.
                                  • Consumers have become much more sensitive to even relatively low inflation rates than in past decades.
                                  • Some price resistance has been neutralized by rising wages
                                  • Falloff in favorable price perceptions has been much larger than ever before recorded.
                                  • Overall, the data indicate that consumers have little tolerance for overshooting inflation targets, and to the benefit of the Fed, interest rates now play a more decisive role in purchase decisions.

                                  Full release here.

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                                  Canadian Dollar soars as CPI hit 3%

                                    Canadian consumer inflation data comes in much stronger than expected. And the Loonie soars.

                                    Headline CPI rose 0.5% mom, 3.0% yoy versus expectation of -0.1% mom, 2.4% yoy. It’s also much stronger than June’s reading of 0.1% mom, 2.5% yoy.

                                    CPI core Common was unchanged at 1.9% yoy. CPI core Median was unchanged at 2.0% yoy. CPI core Trim rose to 2.1% yoy, up from 2.0% yoy.

                                    “While continued strength in energy prices contributed most to the year-over-year increase, higher prices for various services, including air transportation and travel tours, also contributed to consumer price growth in July,” Statistics Canada said.

                                    Full release here.

                                    Also from Canada, international securities transactions rose to CAD 11.5B in June versus expectation of CAD 4.9B.

                                    So now, is an Oct BoC hike a done deal?

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                                    Into US session: Yen strong again as Turkish Lira drops 5%, Chinese stocks hit new low

                                      Entering into US session, Yen is now back trading as the strongest one as markets seem to have turned back to risk off-mode. More time is needed to confirm this but sentiments are once again looking shaky.

                                      At the time of writing, FTSE is trading down -0.17%, DAX down -0.42% and CAC down -0.14%.

                                      Turkish Lira comes back to spotlight with another -5% decline. The trigger is concerns of mores sanction from the US if American pastor Andrew Brunson is not released. The question for us is, in today’s world, whether economic war is considered war. And if yes, then are tariffs and sanctions considered weapons? If the POTUS needs to go through a process, with check and balance, to hit the nuclear button, what does he need to go through to fire an “economic missile”? So far, it seems there is no mechanism to control a dictator in the US to attack another country, even a NATO ally, in the economic sense and cause massive damages and casualties. It’s a big threat to the world. Anyways.

                                      Weakness in Chinese stocks is another concerns for investors. Asian markets closed generally up today. Nikkei gained 0.35%, Hong Kong HSI rose 0.42%. However, the Shanghai SSE closed down -1.35% at 2668.97. The SSE has indeed broke July’s low at 2691.02, and it’s on course for 2638.30 (2016 low). There is no sign of bottoming by market force, nor there is any sign of government intervention. And more importantly, the selloff happened despite news of resumption of US-China trade talks. This highlights underlying vulnerable in the Chinese stocks markets. A break of 2638.30 could trigger some downside acceleration and spread to other parts markets, at least to Asia.

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                                      Eurozone CPI finalized at 2.1%, core CPI at 1.1%

                                        Eurozone CPI was finalized at 2.1% in July, up from June’s 2.0% and compares with 1.3% a year earlier. EU CPI was finalized at 2.2% in July, up from June’s 2.1%, compares with 1.5% a year earlier. Core CPI was finalized at 1.1%.

                                        Geographically, CPI ranged from 0.8% in Greece, 0.9% in Denmark and 1.0% in Ireland, to Romania (4.3%), Bulgaria (3.6%), Hungary (3.4%) and Estonia (3.3%). CPI in Germany was at 2.1%, France at 2.6% and Italy at 1.9%.

                                        Composition-wise, highest contribution came from energy at 0.89%, services at 0.64%, food alcohol and tobacco at 0.49%.

                                        Full release here.

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                                        Australia Trade Minister Ciobo: Countries double down on trade pacts due to protectionist Trump

                                          Australia’s Trade Minister Steven Ciobo said today that the country is going to conclude free trade agreement with Hong Kong and Indonesia by the end of the year. Hong Kong is Australia’s 12th largest trading partner with two-way trade at roughly AUD 16B. The two-way trade with Indonesia is at roughly the same size. And indeed, the FTA with Indonesia could come as soon as next month during Prime Minister Malcolm Turnbull’s visit.

                                          Ciobo also said that he’s hopeful of signing FTA with Pacific Alliance, a Latin American trade bloc, this year. In addition, agreement with China-led Regional Comprehensive Economic Partnership could be in place too.

                                          Ciobo added that due to Trump’s protectionist rhetoric and policies, there has been a “desire from a number of countries to double down” on trade pacts. And that helps him seal deals.

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