Mon, Feb 18, 2019 @ 16:47 GMT

European update: Dollar overwhelmingly weak on elections, Australian Dollar strongest

    Dollar is overwhelmingly the weakest one today. Democrats have already won over 218 seats in House in the mid-term election to regain majority after eight years. Republicans, on the other hand, retained majority in Senate. There are talks that the gridlock in the Congress would limit Trump’s ability to push through more fiscal stimulus. Yet, there is another theory that the stocks markets were usually bullish with a split Congress. DOW futures are now pointing to higher open with triple digit gains. Major European indices are generally higher. So it seems that the latter is more true. And thus, a split Congress is unlikely the reason for Dollar’s weakness. Staying in the currency markets, Canadian Dollar is now the second weakest, followed by Japanese Yen. On the other hand, Australian Dollar is the strongest one, followed by New Zealand Dollar and then Swiss Franc.

    In Europe, at the time of writing:

    • FTSE is up 1.17%
    • DAX is up 1.03%
    • CAC is up 1.36%
    • German 10 year yield is up 0.015 at 0.452
    • Italian 10 year yield is down -0.076 at 3.330

    Earlier in Asia

    • Nikkei dropped -0.28% to close at 22085.80
    • Hong Kong HSI rose 0.1% to 26147.69
    • China Shanghai SSE dropped -0.68% to 2641.34
    • Singapore Strait Times rose 0.1% to 3065.36
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    US PCE inflation accelerated, jobless claims stay low, Canada GDP missed

      US personal income rose 0.3% in July, spending rose 0.4%, both matched expectations. Headline PCE accelerated to 2.3% yoy, up from 2.2% yoy and beat expectation of 2.2%. PCE core also accelerated to 2.0% yoy, up from 1.9% yoy and matched expectation of 2.0% yoy. Core inflation now formally meet Fed’s target.

      Initial jobless claims rose 3k to 213k in the week ended August 25, below expectation of 214k. Four-week moving average dropped -1.5k to 212.25k. That’s the lowest level since December 13, 1969. Continuing claims dropped -20k to 1.708m in the week ended August 18. Four-week moving average of continuing claims dropped -4.5k to 1.73125m.

      Canada data was slightly less impressive. GDP rose 0.0% mom in June versus expectation of 0.2% mom. For Q2, GDP grew 2.9% annualized, slightly below expectation of 3.0%. Exports was the main driver to Q2’s growth, up 2.9%. Consumer spending growth also rose 0.6%. However, there was deceleration in business investments, contraction in inventories and imports. The set of data doesn’t add any additional reason for BoC to hike in September instead of October.

      USD/CAD recovers strongly after the release with focus now back on 1.2981 minor resistance Break will bring stronger rebound.

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      Dovish SNB stands pat, lowers inflation forecasts

        SNB left sight deposit rates unchanged at -0.75%, three-month Libor range at -1.25% to -0.25%, as widely expected. Inflation forecasts for 2018 and 2019 are lowered due to Swiss Franc’s appreciation to Dollar. SNB maintained that negative rate and intervention are essential

        Latest forecasts:-

        • 2018 inflation forecast: 0.6% (prior 0.7%)
        • 2019 inflation forecast: 0.9% (prior 1.1%)
        • 2020 inflation forecast: 1.9%
        • 2018 GDP forecast: around 2%

        Key quotes from the release:-

        • Since the last monetary policy assessment in December, the Swiss franc has appreciated slightly overall on the back of the weaker US dollar.
        • The Swiss franc remains highly valued.
        • The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential.
        • The SNB continues to expect GDP growth of around 2% for 2018 and a further gradual decrease in unemployment.

        Market reactions to the release is muted as seen from EUR/CHF, USD/CHF and GBP/CHF below.

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        Professionals revised up inflation forecast in ECB survey

          ECB released the latest Survey of Professional Forecasters (SPF) today. On Eurozone inflation, SPF respondents raised their headline HICP inflation forecast to 1.7% in 2018 (from 1.5%) , 1.7% in 2019 (from 1.6%) and 1.7% in 2010 (unchanged). They now matched Eurosystem staff projection of 1.7% through 2018 to 2020.

          On Core HICP inflation, SPF projections were unchanged at 1.2% in 2018, 1.5% in 2019 and 1.7% in 2020. That compares to Eurosystem staff forecasts of 1.1% in 2018, 1.6% in 2019 and 1.9% in 2020. That is, SPF respondents expect faster pickup in core inflation in 2018 but the slowed the rise slows quickly.

          On growth, SPF respondents revised down GDP forecast to 2.2% in 2018 (from 2.4%), 1.9% in 2019 (from 2.0%) and 1.6% in 2020 (unchanged). That compares to Eurosystem staff projections of 2.1% in 2018, 1.9% in 2019 and 1.7% in 2020.

          Full report here.

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          White House Kudlow: US is the hottest economy in the world right now

            In a CNBC interview, National Economic Council Director Larry Kudlow referred to Trump’s attack on Fed and said “The president has his own views. He’s stated them many times. There’s nothing new here as far as I can tell.” But Kudlow also added “We all know the Fed is independent. The president is not dictating policy to the Fed. He didn’t say anything remotely like that.”

            Kudlow described the stock market fall yesterday is a “normal correction in a bull market”. And he emphasized “the economic numbers are superb across the board.” Also, he said “We are the hottest economy in the world right now. We’re crushing it … Europe is slowing down. Asia is slowing down. We are moving rapidly.”

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            European stocks follow Asia Higher, China Shanghai Composite ended up 2.16%

              Yen continues to trade as the weakest one for today, followed by Swiss Franc. Meanwhile Dollar pares back some again as markets await US consumer inflation release later today, which could see headline CPI accelerated to 2.9% yoy.

              Global equities stage a strong rebound today as the impact of trade war escalation faded. Investors are getting tired of the noises from the US and China. Some attributed the chance of resuming negotiation between US and China. But we’re don’t buy into this as Trump is clear with what he’s doing. Negotiation has started and ended abruptly, showing no intention to continue. And, just as Trump is blasting NATO allies on spending again today after the latters promised to increase it. It’s clear to the objective eyes whether one is pushing for reforms or finding excuses to quit, and blame the others for his decision.

              Anyway, at the time of writing, DAX is up 0.35%, CAC is up 0.39% while FTSE is up 0.68%. Earlier today, Nikkei closed up 1.17%, Hong Kong HSI rose 0.60%, Singapore Strait Times rose 0.12%.

              More importantly, China Shanghai SSE rose 2.16% to close at 2837.66, back above 2800 handle. The development indicates certain calmness in the markets despite this week’s trade war escalation. And it affirmed the view of strong support between 2016 low at 2638.3 and 2700 psychological level. The rebound from 2691.02 is in progress and break of 2848.37 will extend it to 55 day EMA now at 2984.49. For now, we’re seeing no chance of breakthrough 3000 psychological level. But such near term development is enough to stabilize the Asian markets, which suffered most last week.

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              Sterling soars as UK and EU agreed declaration on future relationship on negotiator level

                Sterling surges broadly on news that UK and EU have agreed on the draft political declaration on future relationship. It’s also confirmed by European Council President Donald Tusk’s tweet. The draft is now “subject to the endorsement of the Leaders” of EU. UK Prime Minister Theresa May will make a statement at 1430GMT.

                Reuters reported that the text of the agreement include:

                • EU and UK “agree to develop an ambitious, wide-ranging and balanced economic partnership.”
                • “This partnership will be comprehensive, encompassing a free trade area as well as wider sectoral cooperation … will be underpinned by provisions ensuring a level playing field.”
                • The relationship would respect “the integrity of the Union’s Single Market and the Customs Union as well as the United Kingdom’s internal market, and recognize the development of an independent trade policy by the United Kingdom beyond this economic partnership.”
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                SNB Jordan warns protectionism is damaging for everyone

                  SNB chairman Thomas Jordan warned of US protectionism in a radio interview today:-

                  • “The risks have not materialised yet, but if international trade doesn’t function well, that is damaging for everyone,”
                  • “Safe havens are sought when there are political uncertainties or big changes in the financial markets. This can be triggered by protectionism,”
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                  Dollar surges broadly and… Mnuchin said Trump fired warning shots to Russia and China on devaluation

                    US Treasury Steven Mnuchin talked to CNBC today and he mentioned President Donald Trump’s tweet regarding Russia and China currency devaluation. Mnuchin said that was a “warning shot at China and Russia about devaluation. China has devalued their currency in the past.” Mnuchin added that “they’ve used a lot of their reserves to actually support the currency. The president wants to make sure they don’t change their plans, and he’s watching it.”

                    Regarding the economy, Mnuchin said “we’re now at a point where we’re comfortably within our 3 percent or higher sustained economic growth”. He added that “we literally have met with hundreds of executives, small companies, big companies, and thousands of workers. We’re beginning to see the impact of the tax cuts, specifically people investing large amounts of money back into the United States.” Also, “the difference between 2.2 and 3 percent will pay for the tax cuts.”

                    Regarding rejoining TPP, Mnuchin just said that Trump would opt to join only when there are more favorable terms to the US. And Mnuchin is “cautiously optimistic.

                    Dollar is broadly higher today, entering into US session, after Mnuchin’s comments. Is it a coincidence? Or…?

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                    Chinese Xi urged to safeguard the rule-based multilateral trading regime

                      Chinese President Xi Jinping called for joint effort in fighting protectionism at a BRICS summit in South Africa today. He told BRICS leaders that “we must work together … to safeguard the rule-based multilateral trading regime; promote trade and investment, globalization and facilitation; and reject protectionism outright.”

                      But Xi should be reminded that EU and US have agreed on a joint position. That is, both EU and US agreed to join forces against “unfair global trade practices”. And specifically, they the practices include “intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state owned enterprises, and overcapacity.” They clearly target China and it’s time for Xi to step up reforms.

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                      China Shanghai SSE declares victory in defending 2016 low

                        China Shanghai SSE rose 0.92% to 2806.81, closed above 2800 psychological level. The main trigger was news that MSCI is considering to significantly increase weighting of A shares in its indexes.

                        The firm break of 55 day EMA and medium term channel resistance indicates medium term bottoming at 2644.29. That is, SSE should have successfully defended 2638.30 key support (2016 low). Further rebound is now in favor in near term. Nonetheless, we’re still seeing no reason for a break through 3000 handle, which is close to 38.2% retracement of 3587.03 to 2644.29 at 3004.41.

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                        UK PM May: Hold our nerve and deliver Brexit on time

                          UK Prime Minister Theresa May is going to make a statement on Brexit in the parliament today. According to her office, May is expected to say “the talks are at a crucial stage.” And she’ll urge that “we now all need to hold our nerve to get the changes this House has required and deliver Brexit on time.”

                          Also, May will say “By getting the changes we need to the backstop; by protecting and enhancing workers’ rights and environmental protections; and by enhancing the role of Parliament in the next phase of negotiations I believe we can reach a deal that this House can support.”

                          But just yesterday, EU chief Brexit negotiator Michel Barnier reiterated that “It’s clear from our side that we are not going to reopen the withdrawal agreement but we will continue our discussion in the coming days.”

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                          Chinese Yuan in decline again, USDCNH heading to 7?

                            The Chinese Yuan is under renewed selling pressure again today. USD/CNH (offshore Yuan) rises to as high as 6.921 so far and breaks 6.912 resistance. The development is apparently dragging down Chinese stocks, with Shanghai SSE down -1.32% at the time of writing. Asian indices are all affected, with Nikkei down -0.38%, HK HSI down -1.52% and Singapore Strait Times down -0.21%. Australian Dollar also suggests deep selling, partly due to such development.

                            USD/CNH has been in steep rise since hitting a low at 6.2359, as trade tension between the US and China escalated. The next batches of tariffs will start next week and more are coming. The Chinese National Development and Reform Commission pledged today to work on meeting this year’s 6.5% growth target. With usual way of interpreting Chinese rhetorics, it means they found it difficult to meet that target.

                            Now USD/CNH is on course to have a test on key resistance level at 6.9871, 2017 high. It remains to be seen if the government will intervene more aggressively. If the Yuan is solely moved by market forces, we see no reason why USD/CNH will not break 7 handle.


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                            RBA cautiously upbeat, but nowhere near a rate hike

                              RBA sounded cautiously upbeat in the minutes of November 6 meeting. There it noted that “Australian economy had continued to improve and had been a little stronger than expected”. However, “outlook for consumption continued to be a source of uncertainty in an environment of slow growth in household incomes”. Conditions in the labor market had also be “stronger than expected”, and “forward-looking indicators of labour demand continued to point to ongoing strength in the near term”.

                              Nevertheless, underlying inflation remained “low and stable”, consistent with previous forecasts. Housing market conditions in Sydney and Melbourne “had continued to ease”. “Housing credit growth had declined, particularly for investors, but had continued to be higher than growth in household income”.

                              Overall, RBA maintained that “the next move in the cash rate was more likely to be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy.”

                              There are also two interesting points to note. Firstly, RBA noted the depreciation in Australian Dollar exchange rate in 2018. And to the board member “this had reflected offsetting effects on the exchange rate from higher commodity prices, on the one hand, and the decline in Australian bond yields relative to those in other major markets, on the other hand.”

                              Regarding future monetary policy moves, board members discussed how different scenarios could affect the decision. And, “the appropriate policy response would depend on the specifics of the situation, including the underlying factors driving economic developments.” RBA also quoted an example in the minutes. “For example, in the event of a marked change in the strength of the global economy, the effect on the Australian economy – and thus the appropriate monetary policy response – would depend on any associated move in the exchange rate of the Australian dollar

                              Full minutes here.

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                              Sterling tumbles as Brexit optimism put into question again

                                Sterling tumbles today as Brexit optimism is put into question again. It’s reported that Brexit Minister Dominic Raab is not going to Brussels this week for the talk on Irish border. And, Prime Minister Theresa May’s office doesn’t expect a deal at the European Council next week.

                                May’s spokesman is also quoted saying that the withdrawal deal with EU will not be agreed without securing a “precise future framework” on relationship. The spokesman also emphasized that there’s a difference between optimistic talk and getting an agreement. He urged EU to move it position.

                                Separately, according to a document seen by Reuters, EU insisted that it’s own Irish border backstop proposal as “pragmatic” that “built on existing health checks on animals and agricultural goods between mainland Britain and Northern Ireland.

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                                Trump: Relations with China have taken a BIG leap forward

                                  More from Trump regarding the weekend meeting with Xi. He said:

                                  • “My meeting in Argentina with President Xi of China was an extraordinary one. Relations with China have taken a BIG leap forward! Very good things will happen. We are dealing from great strength, but China likewise has much to gain if and when a deal is completed. Level the field!”
                                  • “Farmers will be a a very BIG and FAST beneficiary of our deal with China. They intend to start purchasing agricultural product immediately. We make the finest and cleanest product in the World, and that is what China wants. Farmers, I LOVE YOU!”
                                  • “President Xi and I have a very strong and personal relationship. He and I are the only two people that can bring about massive and very positive change, on trade and far beyond, between our two great Nations. A solution for North Korea is a great thing for China and ALL!”

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                                  Into US session: Dollar weakest, Swiss Franc strongest, USD/CHF accelerates downwards

                                    Entering into US session, Dollar and Canadian are the weakest one for today and the week. In particular, USD/CHF suffered renewed selling with a key support level at 0.9848 taken out firmly. That’s also thanks to broad based strengthen in Swiss Franc, which is the strongest one for today and the week. Yen is the second strongest for today but trails behind Euro as the third strongest for the week.

                                    European markets are generally higher today. At the time of writing:

                                    • FTSE is up 1.77%
                                    • DAX is up 1.78%
                                    • CAC is up 1.83%
                                    • German 10 year yield is up 0.0023 at 0.235
                                    • Italian 10 year yield is down -0.0242 at 2.723.
                                    • German-Italian spread is below 250.

                                    Earlier in Asia

                                    • Nikkei closed down -0.31% to 20014.77, still holding above 20000 handle
                                    • Hong Kong HSI rose 0.1% to 25504.20
                                    • China Shanghai SSE rose 0.44% to 2493.90
                                    • Singapore Strait Times rose 0.29% to 3053.43
                                    • Japan 10 year JGB yield dropped -0.0232 to 0.001, very close to 0%.

                                    With today’s downside acceleration, USD/CHF should have a take on 61.8% retracement of 0.9541 to 1.0128 at 0.9765 first. Firm break there will pave the way back to 0.9541 key support level.

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                                    EU-US trade war temporarily averted as Trump made major concession

                                      European Commission President Jean-Claude Juncker’s meeting with US President Donald Trump seemed to have achieved a breakthrough that could avoid a full-blown EU-US trade war. A rather positive joint statement was issued pledging to work towards “zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”. This is taken well generally by both sides.

                                      While the auto tariffs were not mentioned in the joint statement, Juncker later said that the Trump made a “major concession” for holding off on further tariffs, including autos, as long as the negotiations continue. Juncker said he expected Trump to follow through on it. Also, he noted that Trump agreed to reassess the measures in the steel and aluminum sector.

                                      On the other hand, Trump hailed that “a breakthrough has been quickly made that nobody thought possible!” He also told reports that EU is going to start to “buy a lot of soybeans”. Trump also said “they’re going to be a massive buyer of LNG… and we have plenty of it”.

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                                      Minneapolis Fed Kashkari: ‘This time is different’ are the four most dangerous words

                                        Minneapolis Fed President Neel Kashkari warned of the recession signal from flattening yield curve in a paper. Over the past 2.5 years, the difference between 10 year yield and 2 year yield has dropped 134bps to 25bps today, a 10-year low. He warned that “if the Fed continues raising rates, we risk not only inverting the yield curve, but also moving to a contractionary policy stance and putting the brakes on the economy, which the markets are indicating is at this point unnecessary.”

                                        And he added that “this time is different” are the “four most dangerous words in economics”. And such declaration should be a “warning that history might be about to repeat itself.

                                        Full paper here.

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                                        RBA Lowe: Any increase in interest rates, they’re some time away

                                          RBA Governor Philip Lowe delivered a speech titled “Productivity, Wages and Prosperity” today. There he pointed out that “over the past couple of years, output growth has been subdued, but employment growth has been strong.” And, it’s productivity that’s holding the economy back. Low pointed to strong employment growth in household services, but output per hour worked was only 4% higher than it was in 2010. In contrast, the output per hour worked was up 13% to 16% in other industry groups.

                                          He urged “strong ongoing focus on training, education and the accumulation of human capital” to bring up the overall productivity. And he emphasized that “our national comparative advantage will increasingly be built on the quality of our ideas and our human capital.”

                                          Regarding monetary policy, Lowe said the economy is “moving in the right direction” and the next move in interest rate will be “up, not down”. But, “the environment in which interest rates are increasing is also likely to be one in which people’s incomes are growing more quickly than they are now.”And, “any increase in interest rates, however, still looks to be some time away.”

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