12-APR-2019, FRIDAY

1) British Pound Currency Volatility Could Collapse from Brexit Can-Kicking
2) USD/SGD Downtrend at Risk as MAS Lowers Inflation, Growth Estimates
3) Gold Prices Failed to Break Resistance, USD Rose
4) Crude Oil Sink as US Dollar Rise

1) British Pound Currency Volatility Could Collapse from Brexit Can-Kicking

GBPUSD overnight implied volatility took a nosedive from 12.7 percent yesterday to a mere 7.6 percent today in response to the latest Brexit developments. The move lower in anticipated British Pound price action likely follows the reduced probability of no-deal Brexit after EUCO President Donald Tusk and European Union leaders agreed to delay the UK’s departure for a second time. Prior to the EUCO’s offer to extend the Brexit deadline again, the UK was slated to sever itself from the EU on April 12 without a deal following British MPs rejection of Theresa May’s Withdrawal Agreement three separate times.

Consequently, the ongoing impasse in the House of Commons increased the risk of a no-deal, ‘hard’ Brexit which bid up Sterling implied volatility measures. Now that British Parliament has until October 31 to decide the next direction of Brexit, currency option traders are no longer expecting significant price swings in the near future which is expressed by GBPUSD 1-week implied volatility plunging to its lowest level since December 2018. Implied volatility is an indirect variable derived from currency option contracts and is often viewed as a quantitative measure of hedging costs. With less uncertainty, hedging costs tend to fall as well considering the reduced level of risk. Consequently, the 6-month Brexit delay appears to have significantly reduced the risk of a major move in GBPUSD. However, this could in turn suggest that GBPUSD may trade in more established ranges instead of daily Brexit headlines regularly threatening sudden swells that carry the risk of developing into breakouts.

According to the derived 7-month implied volatility which encompasses the new October 31 Brexit deadline, GBPUSD will likely trade within a range of 1.2333 and 1.3843 over the next 7 months. This implied trading range aligns closely with the 76.4 percent and 23.6 percent Fibonacci retracement lines drawn from the low in October 2016 and high in April 2018 – levels that could also provide technical support and resistance. Although, spot prices could continue to coil between rising and falling trendlines shown above while the 61.8 percent and 38.2 percent Fibs may serve as other areas of confluence.

2) USD/SGD Downtrend at Risk as MAS Lowers Inflation, Growth Estimates

USD/SGD rallied in early Friday trade following the latest Monetary Authority of Singapore policy statement and first quarter GDP data. Heading into these developments, the Singapore Dollar, which tends to closely track the US Dollar, was already under pressure by a stronger Greenback. On Thursday, a slew of positive local data lifted front-end government bond yields as Fed rate cut expectations were reduced. The central monetary authority, after slightly increasing the slope of the SGD nominal effective exchange rate twice, opted to hold it, the width and center of the currency band unchanged. For those that are unfamiliar, the MAS conducts monetary policy by targeting the currency’s exchange rate, keeping capital flowing freely between its borders. This involves giving up control over lending rates as Singapore’s economy relies heavily on trade.

The pause in its effort to boost the Singapore Dollar, thus keeping a lid on overall inflation in the nation, occurred alongside a downgrade in core CPI estimates for this year. Now, price growth is anticipated to clock in between 1-2% from October’s estimate of stabilizing just under 2%. Amidst the backdrop of slowing momentum in the global economy, the MAS anticipates GDP to come in below expectations as well. This was underlined by the first estimate of Q1 2019 GDP which crossed the wires 1.3% y/y versus 1.4% expected. This is down from 1.9% in the fourth quarter and is the softest outcome since the fourth quarter of 2015, over three years ago. On the immediate chart below, you can see the reaction in USD/SGD on the 15-minute chart when these developments crossed the wires.

On the daily chart, USD/SGD broke above the well-defined falling trend line from October, opening the door to overturning the dominant downtrend since then. However, and as noted in this week’s ASEAN technical outlook, the Singapore Dollar needs to clear resistance next at 1.3616. Otherwise, this would open the door to more consolidation in the medium-term.

3) Gold Prices Failed to Break Resistance, USD Rose

The US Dollar outperformed against its major counterparts on Thursday amidst a pickup in local government bond yields. This may have been because of rosy domestic economic data. Below, US PPI largely surprised to the upside, countering the trend of increasingly dismal surprises seen in data as of late. Meanwhile, jobless claims fell to their lowest since 1969. In this case, gains in bond yields reflect ebbing dovish Fed monetary policy expectations. Fed funds futures are pricing in about a 50% chance of a cut by the end of this year. Combining this with a stronger US Dollar resulted in the worst day for Gold prices in two weeks. The anti-fiat yellow metal has been tending to increasingly inversely track the Greenback as of late. Because of its performance, Gold nearly wiped out all its gains over the past three days after failing to breach the falling resistance line from late February. Gold remains in consolidation, stuck above support which is a range between 1276 – 1285. However, the monthly chart reveals that the next dominant trend in gold prices may be lower. Keep a close eye on the psychological barrier immediately below.

4) Crude Oil Sink as US Dollar Rise

Commodity prices fell yesterday, pressured by a parallel rise in Treasury bond yields and the US Dollar. The benchmark currency gathered upward momentum having bottomed alongside front-end lending rates as March FOMC meeting minutes crossed the wires late Wednesday. That would prove to set the tone for Thursday’s session. Risk appetite soured at the prospect of higher borrowing costs, leading sentiment-geared Crude Oil prices downward. A downbeat tone is likely to sour sentiment, pressuring Crude Oil lower alongside the spectrum of cycle-sensitive assets. Crude Oil prices pulled back from support-turned-resistance in the 63.59-64.88 area, but the near-term uptrend set from late December is still in place. A break below 60.39 would invalidate the rise, exposing the 57.24-88 area next. Alternatively, a push above resistance would be immediately met with another barrier in the 66.09-67.03 infection zone. Beyond that, the focus turns to the $70/bbl figure.