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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.

 

22 / 02 / 19

 

LONDON OFFICE

 

British Pound

FXStreet: GBP/USD trades modestly flat around 1.3030 while heading towards European open on Friday. The pair declined during the last two days on Brexit pessimism, contrast to upbeat sentiment favoring the US-China trade deal. However, there has been less movement since today morning as investors await further details on the two critical issues discussed. The UK Prime Minister Theresa May visited the European Union Commission chief Jean-Claude Juncker and both the leaders said they are making progress towards solving Irish backstop issue. Assuring the progress, the British finance minister Philip Hammond said that talks with Brussels had been constructive and that lawmakers could vote on a revised deal as early as next week. However, several members from the ruling and the opposition party quit recently and there were challenges to the talks from the EU.

 

On the USD side of the equation, the welcome progress on the first day of Chinese Vice Premier Liu He’s Washington visit ward of the negatives emanating from data miss by the Philly Fed manufacturing index and Markit manufacturing purchasing manager index. Looking forward, the UK PM May will be meeting a few other EU leaders over the weekend in order to provide last ditched efforts to secure a Brexit deal that can be passed through parliament. Meanwhile, the US President Donald Trump will also meet Liu He during Friday afternoon and may push the US-China deal forward. It should also be noted that no major economics are scheduled for release during Friday from either the UK or the US. From a technical point of view the 200-day simple moving average (SMA) level of 1.3000 works as immediate support for the pair, a break of which may drag prices to the 1.2960 and 1.2910 levels. On the upside, 1.3100 and 1.3140 could limit the pair’s near-term advances before diverting buyers towards 1.3215.

 

US Dollar

Reuters: The dollar on Thursday recovered from earlier losses spurred by soft U.S. economic data, as investors consolidated positions and looked for fresh trading incentives amid U.S.-China trade negotiations and talks related to Britain’s exit from the European Union. The greenback earlier fell, hurt by weaker-than-expected U.S. economic data that affirmed expectations the Federal Reserve will hold U.S. interest rates steady this year. “We had weak U.S. data earlier that pushed the dollar lower, but now that move is over,” said John Doyle, vice president of dealing and trading at Tempus Inc. in Washington. “Right now, we’re kind of stuck in some boring, tight ranges. We were kind of hoping for some events to shake things loose, but that didn’t really happen and we’re sort of looking for the next driver,” he added. Doyle noted that those drivers could very well be related to developments on U.S.-China trade talks and Brexit negotiations.

 

The U.S. data came a day after minutes of the Fed’s monetary policy last month said patience was needed when it came to tightening rates, noting a pause in rate hikes gave it time to observe the effects of past increases amid a global economic slowdown. New orders for U.S.-made capital goods, in particular, unexpectedly fell in December, data showed on Thursday, amid declining demand for machinery and primary metals, pointing to sluggish business spending on equipment that could crimp economic growth. “Overall, the durable goods data provide further reason to think that economic growth will soon slow to below its 2 percent potential pace, which will keep the Fed on hold throughout this year,” said Andrew Hunter, senior U.S. economist, at Capital Economics in London. Thursday’s data also showed that the Philadelphia Fed’s manufacturing activity index dropped to a reading of -4.1 this month from 17.0 in January. That was the first negative reading since May 2016. In afternoon trading, the dollar index, a gauge of its value against a basket of six major currencies, was up 0.2 percent at 96.611. The dollar, however, fell 0.2 percent against the yen to 110.69 yen, sliding for the first time in five days. But the greenback gained against the Swiss franc and sterling.

 

South African Rand

Bloomberg: The cost of hedging against price swings in the South African currency over a one-month period plunged more than 120 basis points - the most in the world - on Wednesday, after Finance Minister Tito Mboweni assured investors the government would not take beleaguered power-utility Eskom's debt on to its books, as many had feared. That’s helped restore the currency’s status as one of the premier carry targets in emerging markets after a bout of heightened tension began to eat away at the rand’s yield appeal. Concern that Moody’s Investor Service will downgrade the nation’s debt over a worsening fiscal outlook at a review on March 29 had pushed the implied volatility gauge to its highest level in over a month last week. While the risk of a sovereign downgrade still remains - the government is planning a R69 billion cash injection in the company over the next three years, under strict conditions - rand traders are taking it all in their stride for now. 

 

The currency led an advance across emerging-market currencies on Thursday, rising as much 1% to 13.8744 per dollar. “There might be just enough to convince Moody’s to treat the action as a credit-neutral event rather than a credit-negative,” Johannesburg-based analysts at Rand Merchant Bank wrote in a note to clients on Thursday, referring to the government’s plan for Eskom. “It will be a very close call.” The rand’s one-month implied volatility inched 1 basis point lower on Thursday to 15.73%, hovering around a one-week low touched Wednesday. On Friday morning the rand was trading at R13.99 to the dollar, R18.23 to the pound and R15.86 to the euro.

 

Global Markets

Reuters: Shares in Asia slipped on Friday as a deteriorating global economic outlook outweighed further signs of progress in trade talks between China and the United States. After inching higher in early trade, MSCI’s broadest index of Asia-Pacific shares outside Japan fell into the red as more markets opened across the region, dipping 0.1 percent. Chinese blue-chip shares were down 0.1 percent in late-morning trade after briefly breaking into positive territory. After surging on Monday on optimism over trade talks, China’s major equity indexes have faltered on investor concerns over slowing domestic growth and on indications that Chinese authorities will resort to a benchmark lending rate cut only as a last resort to boost the economy. Growth in China’s new home prices fell to a nine-month low in January as broader economic weakness increasingly weighs on the property sector. Japan’s Nikkei was down 0.4 percent after data showed core consumer inflation accelerated slightly in January but remained far from the central bank’s 2 percent target, underscoring the fragility of the country’s economic recovery. Australian shares gained 0.4 percent.

 

The Australian dollar rebounded after tumbling more than 1 percent Thursday on a Reuters report that China’s northern port of Dalian has placed an indefinite ban on imports of Australian coal. On Friday, Reserve Bank of Australia Governor Philip Lowe cautioned against seeing restrictions as being directed at Australia, and Prime Minister Scott Morrison said the ban does not point to a souring of ties between the countries. Separate comments by Lowe that a rate hike may be appropriate next year also helped to boost the Aussie dollar. It was last up 0.06 percent at $0.7092. The U.S. dollar edged up against the yen to 110.73, while the euro inched slightly higher to buy $1.1337. U.S. crude dipped 0.2 percent to $56.85 a barrel. Brent crude also shed 0.2 percent to $66.92. Gold rebounded after falling more than 1 percent on Thursday, with spot gold trading up about 0.2 percent at $1,326.30 per ounce.

HONG KONG OFFICE

 

Euro

FXStreet: The Euro closed marginally lower Thursday having spent much of the day moving within tightly held ranges. Despite a slew of macroeconomic data sets the combined unit offered little to excite investors bounding between 1.1325 and 1.1365. French, German and broader Eurozone service PMI’s all expanded at a faster pace than anticipated in February, however a contraction in Manufacturing PMI’s countered short-term upside and raised questions about the pace of growth and economic performance across Europe.


A sustained period of weak data sets has prompted a bearish shift in inflation expectations and hopes for a tightening of monetary policy before year end. Key bond yields have been drawn lower further undermining demand for the 19-nation combined unit. With the Euro languishing near six month lows on key indicators risks are still skewed to the downside with support firming at 1.1250.


Attentions now turn to ECB president Mario Draghi as he hits the wires in Italy this evening. Investors will be keenly attuned to the underlying tone of comment with a dovish lilt possibly adding downward pressure into the weekly close.

 

US Dollar

Reuters: The dollar held gains against its peers early on Friday, bolstered by a rise in U.S. yields, while the Aussie clawed back some of its recent plunge on upbeat central bank comments and easing concerns about China’s ban on Australian coal imports. The dollar index against a basket of six major currencies was little changed at 96.582 after edging up about 0.15 percent overnight when long-term Treasury yields surged to a one-week high amid on news of progress in U.S.-China trade talks. 


The rise by the greenback, however, had been limited after Thursday’s soft U.S. economic data, including an unexpected fall in core capital goods orders and weak existing home sales, which affirmed expectations that the Federal Reserve will hold interest rates steady. “The currency market is entering a phase when it is becoming a little numb to political developments such as U.S.-China trade talks and Brexit,” said Takuya Kanda, general manager at Gaitame.Com Research. “It’s back to fundamentals, particularly for the dollar, with each data release until next week’s non-farm payrolls report likely to slowly build directional cues.” 


The euro was 0.05 percent higher at $1.1340 and on track to gain 0.4 percent on the week. The dollar was effectively flat at 110.66 yen following modest overnight losses. It was headed for a gain of roughly 0.2 percent this week. The Australian dollar was up 0.3 percent at $0.7109 after sliding more than 1 percent to a 10-day low the previous day on fears a ban on the country’s coal by a Chinese port would hurt Australia’s already slowing economy. The pound was steady at $1.3042 after inching lower overnight.

 

Australian Dollar

FXStreet: The biggest story in the FX market today was the sharp reversal and big declines in the Australian and New Zealand dollars. These moves were driven entirely by the market's appetite for AUD because there was no NZD data or news. At first, AUD traders were positively surprised by the labor market data that showed solid hiring at the start of the year. More than 39K jobs were created in January with full time work rising by the strongest amount in nearly 2 years. The unemployment rate held at a 7 year low of 5%. 


Unfortunately shortly thereafter Westpac said the Reserve Bank could cut interest rates twice this year. They felt that a lower growth profile and higher unemployment rate will require a response by the RBA in August and November. While there's no doubt the RBA will leave rates unchanged this year, it is too early to tell if one, let alone two rounds of easing is needed because a trade deal between the US and China would go a long way in supporting Australian growth. Instead what really killed the rally in AUD was China's decision to ban imports of Australian coal into their northern port of Dalian. Not only is this a big hit (2% of all Australian coal imports are destined for Dalian) for the industry but China is also getting tough on Australia after they banned Huawei from their 5G network last year. 


AUD/USD lost more than a cent today on the back of these developments and with the pair trading back below all of major moving averages, the next stop could be a move to and below 70 cents. RBA Governor Lowe is speaking this afternoon and its unlikely that he'll say anything to help the currency. The New Zealand dollar has fallen in sympathy with A$ and could slide down to .6740.

 

Global Markets

Reuters: Shares in Asia were flat in early trade on Friday following a fall on Wall Street, with a deteriorating global economic outlook outweighing more signs of progress in trade talks between China and the United States. Early in the Asian trading day, MSCI’s broadest index of Asia-Pacific shares outside Japan was up less than 0.1 percent. Australian shares gained 0.5 percent and Japan’s Nikkei stock index was 0.3 percent lower. Investors continue to closely watch high-level talks between U.S. and Chinese trade negotiators in Washington, with little more than a week left before a U.S.-imposed deadline for an agreement expires, triggering higher tariffs. 


Reuters reported exclusively on Wednesday that the two sides were drafting language for six memorandums of understanding on proposed Chinese reforms, progress that had helped to lift investor sentiment. But shares on Wall Street slumped Thursday, pulled down by new data showing weakness in U.S. business spending plans and factory activity. 


U.S. crude dipped 0.25 percent at $56.82 a barrel. Gold rebounded after falling more than 1 percent Thursday, with spot gold trading up about 0.1 percent at $1,324.92 per ounce.

 

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