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Chinese Yuan Looking to Strengthen in Time

With Chinese economic data continuing to outperform expectations, and the Chinese central bank being one of the rare few which are not incessantly printing to support the economy, the strengthening of the currency is becoming inevitable.

The market continues to consolidate as speculators await the conclusion of the Federal Reserve policy meeting tomorrow. In the apparent lull, precious metals have quietly crept higher and the CNH has made steady gains against the USD.

With Chinese economic data continuing to outperform expectations, and the Chinese central bank being one of the rare few which are not incessantly printing to support the economy, the strengthening of the currency is becoming inevitable. Watch this space!

TRADING PLAN

  1. Gold & Silver — Consolidation continues and price action is getting better.

2. AUD -

AUD/USD — Range between 0.7190–0.7200 and 0.7330–7340, and likely to be in a range for a while.

AUDNZD — Support at 1.0790–1.0800 held strongly and resistance at 1.0930–1.0940 for now. Reduce some at top end of range to allow for dip-buying.

3. EUR/JPY — Stuck in recent range of 124.40–50 to 126.40–50. Back to middle of range after testing the high end of the range. After reducing near the top end of the range, add back some on the dip. Remain patient.

Key risks US equity market weakness and possibility of higher USD yields leading to strong USD.

WHAT HAPPENED YESTERDAY

Market Movements as of New York Close 15 Sep 2020
  • Dollar dipped against riskier currencies as hopes for a COVID-19 vaccine and big corporate deals improved investor appetite for currencies such as the CNH (CNH hit a 16-month high of 6.8053 yuan per dollar on Monday and broke below the psychological level of 6.8000 at the Asian open this morning) and the EUR. GBP bounced back to $1.285, following a fall of 3.66% last week, showing limited reaction after the UK government won an initial Parliamentary vote on its controversial bill to violate the Brexit deal with the European Union. Gold and Silver continue to creep steadily higher as weak longs seem to have all given up after the recent weakness in prices.
  • S&P 500 rose 1.3% on Monday, as a spate of corporate deals and encouraging vaccine news helped the market rebound from back-to-back weekly declines. The Nasdaq Composite gained 1.9%, and the Dow Jones Industrial Average gained 1.2%. The Russell 2000 outperformed with a 2.7% gain.
  • Starting with the key M&A news, NVIDIA (NVDA 514.89, +28.31, +5.8%) agreed to acquire Arm Holdings from Softbank for $40 bln in cash and stock; Gilead Sciences (GILD 66.34, +1.44, +2.2%) agreed to acquire Immunomedics (IMMU 83.65, +41.40, +98.0%) for about $21 bln, or $88.00 per share, in cash; and Verizon (VZ 60.32, +0.53, +0.9%) agreed to acquire Tracfone for $6.25 bln in cash and stock.
  • Separately, Oracle (ORCL 59.46, +2.46, +4.3%) reportedly formed a partnership with TikToK U.S. after Microsoft’s (MSFT 205.41, +1.38, +0.7%) acquisition bid was rejected. Walt Disney’s (DIS 131.20, -0.55, -0.4%) ESPN entered into two separate multi-year agreements with Caesars Entertainment (CZR 55.39, +5.28, +10.5%) and DraftKings (DKNG 48.62, +7.16, +17.3%).
  • AstraZeneca (AZN 54.02, +0.29, +0.5%) resumed its COVID-19 vaccine trials in the UK. Pfizer (PFE 37.01, +0.94, +2.6%) for its part reiterated expectations to have conclusive results from its Phase 3 COVID-19 vaccine trial in October while also planning to expand enrollment.
  • Treasury’s Mnuchin, Fed’s Powell to testify before the Senate panel on Sept. 24 on coronavirus relief.
  • Chinese consumers stepped up their spending in August, in a sign of further economic recovery from the shock of the coronavirus pandemic. Retail sales rose 0.5% in August (expected 0.0%) from a year ago, the first positive report for the year so far, China’s National Bureau of Statistics said Tuesday. China’s Industrial Production increased 5.6% Year-on-Year in Aug (ve expectations +5.1%) in yet another sign that the Chinese economy is recovering stronger than expected.

HEADLINES:

NVIDIA’S ARM DEAL SPARKS QUICK BACKLASH IN CHIP INDUSTRY

Nvidia Corp’s $40 billion agreement to acquire Arm Ltd from SoftBank Group Corp 9984.T is likely to meet strong opposition from Nvidia’s chip industry rivals, analysts say, with murmurs of protest emerging in South Korea and China within hours of the deal’s announcement.

Arm has unparalleled reach as a supplier of designs and intellectual property to most of the global semiconductor industry, licensing its technology to customers such as Intel Corp INTC.O, Qualcomm Inc QCOM.O and Samsung Electronics Co Ltd 005930.KS who increasingly compete with Nvidia.

Arm’s open approach of licensing its designs to all comers has turned the 160 billion chips sold based on its technology into a huge ecosystem of devices from smartphones to smart toasters.

South Korean chip industry officials and experts said that Nvidia’s Arm buy would intensify Nvidia’s competition with Samsung, Qualcomm and others in self-driving cars and other future technologies, while raising concerns that Arm could hike licensing fees for competitors.

Thematic Context: “Thursday’s orders may actually be a key part of the U.S. Secretary of State Mike Pompeo’s broader China strategy. Provoking a Chinese reaction forces U.S. companies to start considering the risk of their positions in China. This isn’t just about walling off Chinese tech from global markets — it’s an attempt to force a much wider economic decoupling. The moves by China hawks inside the administration definitely won’t end here; many more forms of Chinese power and economic reach are likely to be targeted in the next few months.” — 9th Aug 2020

JOHNSON FACES REVOLT OVER PLAN TO BREAK BREXIT TREATY

British Prime Minister Boris Johnson will try to persuade rebellious lawmakers in his party to vote on Monday for a bill that would break international law by breaching parts of the Brexit divorce deal and that Brussels says will wreck trade talks.

Johnson’s plan to explicitly break international law has plunged Brexit back into crisis less than four months before Britain is finally due to leave the EU’s orbit at the end of a transition period, and jeopardised trade talks.

EU diplomats and officials said the bloc could take legal action against Britain, though there would be no resolution before the end-of-year deadline for its full exit.

The EU has ramped up preparations for a no-deal Brexit, which would be chaotic for business, markets and nearly $1 trillion in annual trade.

Thematic Context: “European lawmakers have warned they would not approve any new trade deal unless the withdrawal agreement was fully implemented, while there is also talk of possible legal action. Expect elevated volatility in GBP this week, and any shenanigans outside of the aforementioned agreement will cause GBP to be sold. We suggest traders stay clear of GBP till the controversy abates, as it is pretty random now.” 13th Sep 2020

JAPAN’S SUGA WINS PARTY LEADERSHIP RACE, HEADED FOR PREMIERSHIP

Japanese Chief Cabinet Secretary Yoshihide Suga, a loyal aide to outgoing prime minister Shinzo Abe, won a landslide victory in a ruling party leadership election on Monday, paving the way for Japan’s first change of leader in nearly eight years.

Suga, 71, who has promised to continue Abe’s key policies, said his big win would give him the backing to pursue his reform goals — including deregulation and breaking down bureaucratic silos — and that containing the coronavirus and reviving the economy were conditions for calling a snap general election.

“As I got big support in numbers today, the environment in which I can pursue my policy agenda in a stable manner has been secured,” Suga told a news conference.

Suga won 377 votes out of 534 votes cast, and 535 possible votes, in the leadership election by the Liberal Democratic Party (LDP) members of parliament and representatives of its 47 local chapters.

Suga has said he would continue Abe’s signature “Abenomics” strategy of hyper-easy monetary policy, government spending and reforms while juggling the problems of COVID-19 and a slumping economy, and confronting longer-term issues such as Japan’s ageing population and low birth rate.

Thematic Context:What might catch markets by surprise is Suga calling a snap general election after he wins. The rest of Abe’s term would end in one year, so if Suga becomes Prime Minister, he may call an early general election now that he is riding high in opinion polls and his party is unified behind him, to improve his chances of winning a full term in office. If so, this might lift the JPY, as a general election would present a risk to the continuity of ‘Abenomics’.— 12th Sep 2020 (Weeklies)

DAY AHEAD

There are no notable events in the day ahead, risk appetite will continue to be driven by Tech risk sentiment & vaccine developments as the market awaits the conclusion of the Federal Reserve policy meeting tomorrow.

SENTIMENT

FX

STOCK INDICES

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