· The dollar held onto gains on Friday after a surge in U.S. retail sales eased concerns about the world’s top economy, but traders cautioned against reading too much into one piece of data given the growing risks to the outlook.
The greenback was on course for a weekly gain against safe-haven currencies such as the Japanese yen and the Swiss franc, pointing to some respite for frayed nerves after fears of recession and protests in Hong Kong rattled financial markets.
During Asian trading the dollar briefly extended gains and the yen fell as Japanese stocks erased early losses to trade higher and as U.S. Treasury yields rose slightly. The move quickly faded, however, partly reflecting thin treading due to the summer holiday season.
· Against a basket of six major currencies, the dollar index edged higher to 98.218. Since hitting a three-week low on Aug. 9, the dollar index has recovered, rising around 1%.
The dollar was little changed at 106.18 yen in Asian trading after rising 0.2% on Thursday.
For the week, the greenback was up 0.5% against the Japanese currency, its biggest gain since the week ended July 26.
· Sterling was marginally higher, on course for its first weekly gain since mid-July, as positive data on retail sales and consumer pries showed the British economy is in better shape than some investors had feared.
The pound traded at $1.2088, close to a one-week high of $1.2150.
· The US economy is taking a turn for the worse and there is a 40% chance America could experience a recession before the 2020 presidential election, Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, said on Friday, according to CNBC.
Recessions are always inevitable, the only question is when?
An economic slowdown globally will prompt central banks, including the US Federal Reserve, to ease monetary policies even further.
I think we are entering an environment that, over the next three years, you will see more currency wars. And whether there are overt interventions or whether their monetary policies that produce that.
· The Goldman Sachs analysts offer an outlook on the Fed’s interest rate policy and the US dollar over the coming months, in the latest overnight note.
Key Quotes:
-“Expect another 50bp of rate cuts.
-Not looking for as deep cuts from the FOMC as the market is expecting.
-Expect the USD to weaken over the medium-term.
-But downside will likely be limited in near term - modest move higher against Asian Emerging Market (EM) currencies and the EUR.
-USD still seen as a 'haven' - will limit downside.
-Path ahead depends on the relative growth and policy outlook -- and we should get clearer signs on both in the next month or two.”
· U.S. President Donald Trump’s administration will be imposing new tariffs on Chinese goods in September and December.
Those new tariffs could deal another blow to China — and it remains to be seen how much more Beijing can do to prop up its economy, says Bruce Kasman, J.P. Morgan’s chief economist and head of global economic research.
Kasman predicts a 40% chance of a global recession in the next six to nine months.
· The trade war between the U.S. and China has dragged on for more than a year, and it’s starting to turn into a brewing currency war, said analysts.
In a recent report, the Bank of America (BofA) Merrill Lynch Global Research predicts what might happen to the Chinese yuan in three scenarios.
Scenario 1: A full blown trade war — the yuan depreciates 10%.
Chinese imports from the U.S. are only a third of American imports from China, the bank pointed out. This means that China cannot match the U.S. tariffs in terms of quantity. However, one thing Beijing can do is to devalue the yuan by 10%, canceling off the impact of a 10% tariff on Chinese goods, BofA Merrill Lynch Global Research analysts said.
Scenario 2: A drawn out impasse — the yuan remains “unchanged.”
“In a protracted impasse, RMB is likely to remain range bound, only because Beijing would be wary of both angering the US by allowing the RMB to weaken or adding even more headwinds facing Chinese exporters by allowing the RMB to strengthen,” the bank said, referring to the yuan’s other name, the renminbi.
Scenario 3: An imminent trade deal: The yuan appreciates “modestly.”
In this situation, the value of the yuan will go up but will be limited.
This is because “any deal is likely to include stipulation that would limit the room for any future RMB depreciation,” the bank explained. “If Beijing feels that the downside for the RMB is limited, it is likely to want to limit the upside for the RMB, especially if it thinks any RMB appreciation becomes difficult to reverse politically.”
· The US Federal Reserve said in its statement on Thursday, Chairman Jerome Powell is scheduled to address an annual central bank forum in Jackson Hole, Wyoming, next week.
Powell will speak on “Challenges for Monetary Policy” at the major economic policy forum on August 23rd, Friday. The three-day symposium concludes on August 24th.
Powell’s comments will be closely watched for fresh hints on the interest rates outlook amid heightened concerns over the potential for a recession and an ongoing US-China trade spat.
· The Fed will be in focus next week, with the central bank's annual symposium in Jackson Hole, Wyoming, kicking off on Thursday. Prior to that, though, Wall Street will dissect the Federal Open Market Committee (FOMC) July meeting minutes, looking for clues to the future pace of rate cuts.
Things will pick up on Wednesday, Aug. 21, with data on existing home sales and weekly crude inventories out. The minutes from the latest FOMC meeting will be the day's big feature, slated for release at 2 p.m. ET. Earnings from L Brands (LB), Lowe's (LOW), Nordstrom (JWN), and Target (TGT) are slated for release.
For Thursday, Aug. 22, weekly jobless claims are due, along with the Fed's balance sheet. The central bank's annual symposium in Jackson Hole, Wyoming, will also kick off. Wall Street will also comb through earnings from Children's Place (PLCE), Dick's Sporting Goods (DKS), Gap (GPS), Hormel Foods (HRL), HP (HPQ), Intuit (INTU), Ross Stores (ROST), and VMware (VMW).
The second day of the Fed's three-day symposium will commence on Friday, Aug. 23. Investors will also look at new home sales. As far as earnings, Buckle (BKE), Foot Locker (FL), and Hibbett Sports (HIBB).
· President Donald Trump on Thursday said he has “no doubt” that Chinese President Xi Jinping could bring an end to the unrest in Hong Kong by meeting face to face with the protesters.
Trump said this in a tweet Thursday morning, less than a day after he first appeared to propose that a “personal meeting” between himself and Xi could bring a speedy end to “the Hong Kong problem. ”
· The Bank of Japan (BOJ) has reduced purchases of the Japanese government bonds (JGBs) maturing in five to ten years for the first time since December 2018 in order to put a floor under the sliding yields.
In today's routine operation, the BOJ will be buying bonds worth JPY 450 billion, down from the previous purchase of JPY 480 billion.
The move to reduce bond purchases by JPY 30 billion comes after Japan's 10-year yield fell to -0.25%, the lowest level since July 2016. With the drop to three-year lows, the benchmark yield slipped well below the -0.2% mark perceived by markets as the central bank's line in the sand.
· Japan surpassed China as the largest foreign holder of U.S. Treasury securities in June.
Japan has added about $21 billion since May, making its holdings the largest since October, 2016. Japan now holds $1.12 trillion Treasurys, and China has $1.11 trillion, a $2 billion increase from the month earlier, according to U.S. Treasury department data.
China has been a less aggressive buyer of the U.S. sovereign debt, and market players have speculated that one action it could take in the trade war with the U.S. is to lighten up on its U.S. holdings. But there are no signs that is happening, according to traders.
· Japan’s exports likely fell for an eighth straight month in July, a Reuters poll showed Friday, as a protracted U.S.-China trade war and weak global demand hurt shipments from the world’s third-largest economy.
Exports in July were forecast to have shrunk 2.2% from a year earlier, which would extend a slump that began in December last year, but not as bad as a revised 6.6% decline in June.
Many export-reliant economies such as Japan have been hit hard by the Sino-U.S. tariff row, which has already upended supply chains and undermined global trade, investment and corporate earnings.
· Goldman Sachs Group Inc. slashed growth forecasts for the “Asian Tigers” as their exposure to the world economy -- once one of their greatest strengths -- is now backfiring as global growth slows amid trade tensions.
“Besides their own domestic reforms, they all benefited enormously from the broader context of globalization and the rapid economic development of the Asia-Pacific region,” Goldman economists led by Andrew Tilton wrote in a report Thursday. “However, the same characteristics that helped them benefit on the upside have left them relatively more exposed to the recent slowdown in global growth.”
Hong Kong: Goldman expects gross domestic product to shrink 0.5% in the third quarter from a year earlier, as opposed to its earlier projection of 2.1% expansion. For full-year 2019, Goldman sees just 0.2% expansion. In addition to a weak global growth and trade environment, ongoing political protests have affected domestic demand, the economists wrote.
Singapore: Goldman lowered its forecast for 2019 GDP growth to 0.4% from a previous 1.1% projection. The Monetary Authority of Singapore is likely to reduce the slope of its exchange-rate band -- its primary monetary-policy tool -- to 0.5% per year from the current 1% at its October meeting, and then to 0% in April 2020, according to the economists.
South Korea: Goldman sees the economy growing 1.9% this year, lower than the 2.2% it previously forecast. The firm now expects another 25-basis-point cut to the benchmark interest rate this year -- most likely in October -- in addition to July’s cut.
Taiwan: Taiwan’s 2019 GDP forecast was lowered to 2.3% from 2.4%, as the hit from the trade war is somewhat offset by a U.S. move to import more from Taiwan and less from China.
· Prime Minister Boris Johnson’s government would win a vote of no confidence put forward by the opposition Labour Party, energy minister Kwasi Kwarteng said on Friday.
On Thursday Labour urged rebel lawmakers in the ruling Conservatives to help block a no-deal Brexit by bringing down Johnson’s administration and allowing Labour leader Jeremy Corbyn to form a caretaker government before a general election.
· Crude oil prices rose more than 1% on Friday following two days of declines, buoyed after data showing an increase in retail sales in the United States helped dampen concerns about a recession in the world’s biggest economy.
Brent crude LCOc1 was up 68 cents, or 1.2%, at $58.91 a barrel at 0650 GMT, after falling 2.1% on Thursday and 3% the previous day.
U.S. crude CLc1 was up 63 cents, or 1.2%, at $55.10 a barrel, having dropped 1.4% the previous session and 3.3% on Wednesday.
· Daily FX: CRUDE OIL TECHNICAL ANALYSIS
Crude oil prices slipped back below the lower bound of the 54.72-56.09 congestion area, breaking the weekly uptrend in the process. Sellers may now move test the 49.41-50.60 zone anew. A daily close above trend resistance set from late April – now at 58.53 – seems necessary to neutralize downward pressure.
Reference: CNBC, Reuters, FX Street, Daily FX
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