Monday, February 18, 2019

Capital Markets: "Dollar Drifts Lower"

From Marc to Market:
Overview: In quiet turnover, the US dollar slipped lower against most of the major currencies to start the new week. The news stream is light and the US markets are closed today. The MSCI Asia Pacific Index was up five of the past six weeks and extended its gains today. Nearly all the equity markets in the region rose but India. European markets are narrowly mixed in the morning trade. Bond yields firmed in the Asia Pacific region, while benchmark yields in Europe were mostly softer.

Asia Pacific
Shares in Shanghai rose 2.7% while the Shenzhen Composite rose 3.7% on heavy volume. Both indices are now up more than 10% for the year. Optimism on trade talk with the US and stimulative domestic measures were cited as factors behind the advance. At the same time, the wholesale auto sales slumped 17.7% in January, accelerating the losses seen since the middle of last year, while retail sales fell for the eighth consecutive month. Note that Europe reported declining auto sales for five months through January. US auto sales matched a five-month low in January.

As an entrepot, Singapore economic performance, especially trade, is seen as a reflection of regional trends. News that its non-oil exports fell 10.1% in January (year-over-year), the most in a couple of years and three times more than expected is an ominous sign. Volatility around the Lunar New Year is not unusual, but it was the third monthly decline.

The dollar has been confined to around 10 ticks on either side of JPY110.50 thus far today. Several expiring options are in play, including $465 mln at JPY110.60 and $360 mln at JPY110.25. There are $2.4 bln struck at JPY110.00 that will be cut today. The intraday technicals favor a range extension to the upside. The Australian dollar extended its gains from the end of last week and it testing the 20-day moving average (~$0.7150) for the first time in a couple of weeks. Resistance is pegged in the $0.7175-$0.7200 range. Meanwhile, the dollar is trapped in a CNY6.75-CNY6.80 trading-range.

There are two main issues demanding investors' attention in Europe: The first is the state of the slowdown in both depth and duration, which seems to be the key to the policy response. This week's flash PMI will offer fresh insight. The second is Brexit. Cameron's idea that a referendum would allow the Tory Party to close ranks has proved wide of the mark. The fissures with the Tory Party are as acute as ever. Indeed, May's strategy appears to be shaped by the desire to minimize the risk of a formal break. News today has focused on the possibility that as many as seven members of the Labour Party resign over the handling of Brexit and anti-semitism.

US and Europe are coming to loggerheads on a number of issues. There are tensions over the US unilateral withdrawal from the treaty with Iran. The US exemptions for several of Iranian's largest oil customers is set to expire in April. Europe, including the UK, may not follow the US in banning Huawei. Reports suggest other controls may be implemented. The US Commerce Dept submitted its report into the security implications of imports. No details have been provided yet, but European brands are seen as particularly vulnerable....MORE