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DAILY BRIEF

 

 

The Daily Brief is a free email sent out each morning with information about overnight market movements and insights into the issues of the day. The brief is free and will help you keep an up-to-the-minute eye on the currency markets.

 

19 / 07 / 19

 

LONDON OFFICE

 

British Pound

Reuters: The pound rebounded on Thursday after stronger-than-expected retail sales numbers, also finding support from a vote by lawmakers to make it harder for Britain’s next prime minister to try to force a no-deal Brexit. MPs approved the final wording of the plan, although an already stronger sterling reacted little. Boris Johnson, the favourite to succeed Prime Minister Theresa May, has said Britain must leave the European Union by Oct. 31 with or without a deal and has refused to rule out suspending parliament to prevent lawmakers from trying to block his exit plan. That has rattled investors who fear a government under Johnson would increase the risk of a no-deal Brexit, and this week they dumped sterling, which dropped to a 27-month low against the dollar and a six-month low versus the euro. But on Thursday the currency recovered some of those losses, with traders who had bet against it taking some profits.


Explaining sterling’s strength, analysts also cited media reports which said EU chief negotiator Michel Barnier was open to alternative border plans for Ireland - a major sticking point in Brexit negotiations. The Irish prime minister said likewise. But many expect tumultuous times for sterling as the Brexit deadline nears. “There is going to be an intensification of a no-deal Brexit scenario as October approaches,” said John Wraith, head of UK rates strategy at UBS. Several economists have predicted UK gross domestic product shrank in the second quarter, but the unexpected rebound of retail sales in June may raise hopes that the economy kept growing. Nomura strategists however warned that this set of data is highly volatile. “Sizable monthly rises often follow on from sizable monthly falls and vice versa.” Adam Cole, strategist at RBC Capital Markets, said its UK economic surprise index has swung from strongly positive to strongly negative over the last couple of weeks.” “While sterling’s recent underperformance is mostly related to a rising political risk premium, weak economic data have also played their part,” he said. The pound was up 0.4% at $1.2477, after rising to as high as $1.2494, a two-day high, and further away from the 27-month low of $1.2382 hit on Wednesday. Against the euro, sterling increased 0.4% to 89.92 pence, retreating from a high of 89.795 earlier.. It had hit a six-month low of 90.51 on Wednesday.

 

US Dollar

Reuters: The dollar was on the defensive on Friday after Federal Reserve officials bolstered expectations of an aggressive rate cut this month to address weakening price pressures. At a central banking conference on Thursday, New York Fed President John Williams argued for pre-emptive measures to avoid having to deal with too low inflation and interest rates. Although a New York Fed representative subsequently said Williams’ comments were academic and not about immediate policy direction, investors still took his remarks along with separate comments from Fed Vice Chair Richard Clarida as a dovish signal from the central bank. The dollar stood at 107.42 yen, up 0.15% in early trade, having hit a three-week low of 107.21 on Thursday while the euro also slipped 0.15% to $1.12555 from $1.1282. On the week, the dollar is down 0.4% versus the yen and almost flat on the euro. The dollar index, which hit a two-week low of 96.648, bounced to 96.824.


The greenback fell broadly on Thursday after Williams’ remarks bolstered bets that the Fed would cut interest rates by 50 basis points, rather than 25 basis points. Williams said when rates and inflation are low, policymakers cannot afford to keep their “powder dry” and wait for potential economic problems to materialize. That is especially true with neutral rates that would neither restrict nor accelerate the U.S. economy “around half a percent,” he said. When adjusted for inflation, the neutral rate is near the Fed’s current policy rate, which is in a range of 2.25-2.50%. Financial markets quickly reacted, with money market futures pricing in almost a 70% chance of a 50 basis point cut at its policy meeting on July 30-31 at one point. The odds eased to around 40% after the New York Fed said later that his speech was not about potential actions at the upcoming policy meeting. Still, Williams’ rate-cut view was echoed by Fed Vice Chair Clarida, who told Fox Business Network the central bank might have to act early and not wait “until things get so bad”. “Williams’ comments were surprisingly dovish. The NY Fed went all the way to try to modify the message but no one seems to have done so for Clarida, who also said a very similar thing,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

 

South African Rand

BDL: The rand gained a few cents after the Reserve Bank’s monetary policy committee (MPC) cut interest rates by 25 basis points (bps) on Thursday afternoon, a decision widely expected by market. Reserve Bank governor Lesetja Kganyago said there had been “no discussion” of a 50bps cut in the repo rate for July, although the decision to cut by 25bps had been unanimous. Markets had been partially pricing in a 50bps cut, and the Bank’s tone had been somewhat hawkish, said Cristian Maggio, head of emerging-markets strategy at TD Securities. At 4pm, the rand was 0.76% firmer at R13.9035/$, after trading at R13.99 as Kganyago began speaking. It gained 0.68% to R15.6245/€ and 0.26% to R17.3751/£. The euro was flat at $1.125. A stronger rand and a rally in local bonds recently made room for the Reserve Bank to cut interest rates by 25bps in July, but further cuts may be made more difficult by the prospect of looming volatility in emerging markets, according to analysts.


The rand, along with its emerging-market peers, has rallied in recent months due to a weaker dollar, as markets price in a series of interest-rate cuts by the US Federal Reserve. Local bond yields have also fallen, with the benchmark 10-year, due in 2026, near a 15-month low on Thursday. “The market seems to be buying risk rather than selling it,” said Maggio, adding, however, this is largely due to the expectation of looser Fed monetary policy, but SA’s idiosyncratic risks continue. “The MPC assesses the risks to the growth forecast to be balanced in the near term but remains concerned about longer-term risks,” Kganyago said on Thursday. “Investment prospects will continue to be limited in the absence of structural reforms. The escalation of trade tensions could have further negative impacts.” The best-case scenario is for the Bank to remain cautiously dovish, said Mercato Financial Services analyst Nico du Plessis in a note released ahead of the announcement. While in the short-term, one or two 25bps cuts could be justified, should the global economy continue to slow and the dollar recover, emerging markets could see heightened volatility, Du Plessis said. “Investors are urged to consider the ramifications of a series of interest-rate cuts should they materialise.” He added that any rand strength in the coming months may not be sustained over the longer term. Markets have now probably largely priced in Fed cuts, and while emerging-market bonds have rallied in recent months, a correction looked imminent, Nedbank Corporate and Investment Banking senior strategist Neels Heyneke said in a note. The rand, however, should continue to outperform other emerging-market currencies as much of SA’s government debt was rand-denominated, he said. Although global central banks will respond to slowing global growth with looser monetary policy, they may be underestimating the extent to which global liquidity will contract. There could be pressure on the global carry trade, Heyneke said. The carry-trade refers to borrowing money in a low interest-rate environment in order to buy higher-yielding assets — such as emerging-market bonds.

 

Global Markets

Reuters: Asian stocks gained and the dollar sagged on Friday after a top Federal Reserve official all but cemented expectations of a U.S. interest rate cut later this month. New York Fed President John Williams said on Thursday that policymakers need to add stimulus early to deal with too-low inflation when interest rates are near zero and cannot wait for economic disaster to unfold, in a speech read as a strong argument in favour of quick action. The comments by Williams made it a virtual certainty the Fed would opt to cut interest rates by 25 basis points (bps) at its July 30-31 policy meeting and also fuelled expectations of an even deeper 50 bp reduction. Financial markets quickly reacted, with futures at one point pricing in almost 70 percent chance of a 50-basis-point cut at the month-end meeting. The odds eased to around 40 percent after the New York Fed clarified later that Williams’ speech was not about potential action at the upcoming policy meeting.


Wall Street shares shook off a sluggish start and moved higher overnight thanks to the dovish comments by Williams. Australian stocks added 0.4%, South Korea’s KOSPI rose 0.8% and Japan’s Nikkei advanced 1%. MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.3%, squaring the previous day’s losses. The index was up only 0.3% on the week, as riskier assets were partly capped by U.S. President Donald Trump’s reiteration of his threat to impose further duties on Chinese imports. The two sides resumed talks recently to try and end a year-long trade war that has rattled financial markets and slowed global growth. “Dovish Fed policy expectations do provide support for the equity markets, which are set to rebound after suffering losses the previous day. But factors such as U.S.-China trade issues and tensions over Iran are likely to limit the markets’ gains,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management. The dollar index against a basket of six major currencies stood little changed at 96.778 after losing roughly 0.5% overnight to a two-week low of 96.671 in the wake of comments from the Fed’s Williams. The greenback was up 0.15% to 107.460 yen after the New York Fed tried to clarify Williams’ earlier comments, crawling away from a three-week trough of 107.210 marked on Thursday when the currency lost 0.6% against its Japanese peer. The euro was 0.1% lower at $1.1262 after climbing 0.45% the previous day. U.S. Treasury yields were lower across the board in light of Williams’ dovish views. The 2-year yield was at 1.7908% after touching a two-week low of 1.7520%. The 10-year yield declined to a 10-day trough of 2.023% and was last at 2.045%. In commodities, U.S. crude oil futures rose 1% to $55.90 per barrel after slumping 2.6% overnight. Oil prices had fallen on Thursday amid expectations that crude output would rise in the Gulf of Mexico following last week’s hurricane in the region. Spot gold extended the previous day’s rally made on the prospects of lower U.S. interest rates and brushed a six-year high of $1,452.60 an ounce, before pulling back a touch to $1,442.25.

HONG KONG OFFICE

 

British Pound

FXStreet: The GBP/USD pair’s recent recovery is currently struggling with the 100-bar moving average (4H 100MA) while taking the rounds to 1.2545 on early Friday. Not only repeated failure to cross the key short-term moving average (MA) but overbought conditions of the 14-bar relative strength index (RSI) also signals brighter chances of the quote’s pullback to 1.2510/05 area comprising multiple supports and June month low.

 

In a case where sellers dominate past-1.2505, July 09 low close to 1.2440 and current month bottom surrounding 1.2382 could be on their radars. Alternatively, pair’s ability to rise beyond 4H 100MA level of 1.2551 will be tested by the 11-week old descending trend-line ranged since early-May, at 1.2594. However, a successful break of 1.2594 opens the gate for the rally towards late-June lows close to 1.2660.

 

US Dollar

Reuters: The dollar was on the defensive on Friday after Federal Reserve officials bolstered expectations of an aggressive rate cut this month to address weakening price pressures. At a central banking conference on Thursday, New York Fed President John Williams argued for pre-emptive measures to avoid having to deal with too low inflation and interest rates. Although a New York Fed representative subsequently said Williams’ comments were academic and not about immediate policy direction, investors still took his remarks along with separate comments from Fed Vice Chair Richard Clarida as a dovish signal from the central bank.

 

The dollar stood at 107.42 yen, up 0.15% in early trade, having hit a three-week low of 107.21 on Thursday while the euro also slipped 0.15% to $1.12555 from $1.1282. On the week, the dollar is down 0.4% versus the yen and almost flat on the euro.

 

The greenback fell broadly on Thursday after Williams’ remarks bolstered bets that the Fed would cut interest rates by 50 basis points, rather than 25 basis points. Williams said when rates and inflation are low, policymakers cannot afford to keep their “powder dry” and wait for potential economic problems to materialize. That is especially true with neutral rates that would neither restrict nor accelerate the U.S. economy “around half a percent,” he said. When adjusted for inflation, the neutral rate is near the Fed’s current policy rate, which is in a range of 2.25-2.50%.

 

Japanese Yen

FXStreet: USD/JPY dropped from 108.00 to 107.21 for a one-month low overnight. Federal Reserve James Williams was advocating for significant easing. USD/JPY dropped from 108.00 to 107.21 for a one-month low overnight. In Tokyo, the price has been stabilising between 107.33/43. The slide in the pair came despite a strong end to Wall Street that took stocks off their lows. The Dollar was the culprit in the main after Federal Reserve speakers played up the rate cut ante. 

 

Valeria Bednarik, the Chief analyst at FXStreet explained that the USD/JPYpair was heading into the Asian session technically bearish according to the 4 hours chart, as the pair continued developing below all of its moving averages, and with the 20 SMA gaining bearish traction below the larger ones: "The Momentum indicator in the mentioned chart has extended its decline within negative territory, while the RSI turned sharply lower, all of which maintains favors further slides ahead. Trading now around the previous monthly low, the pair has room to extend its decline to 106.77, June’s low, during the upcoming sessions."

 

Global Markets

Reuters: Asian stocks gained and the dollar sagged on Friday after a top Federal Reserve official all but cemented expectations of a U.S. interest rate cut later this month. Wall Street shares shook off a sluggish start and moved higher overnight thanks to the dovish comments by Williams. Australian stocks added 0.4%, South Korea’s KOSPI rose 0.8% and Japan’s Nikkei advanced 1%. MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.3%, squaring the previous day’s losses.

 

In commodities, U.S. crude oil futures rose 1% to $55.90 per barrel after slumping 2.6% overnight. Oil prices had fallen on Thursday amid expectations that crude output would rise in the Gulf of Mexico following last week’s hurricane in the region. Spot gold extended the previous day’s rally made on the prospects of lower U.S. interest rates and brushed a six-year high of $1,452.60 an ounce, before pulling back a touch to $1,442.25.

 

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