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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.

 

21 / 10 / 19

 

LONDON OFFICE

 

British Pound

Reuters: Sterling fell over half a percent against the dollar on Monday, slipping from five-month highs after the British parliament delayed a crucial vote on a Brexit withdrawal agreement. The move derailed Prime Minister Boris Johnson’s plan for a decision on his withdrawal deal, but the pound held the bulk of its recent rally on confidence that a disorderly exit from the European Union would be avoided. In Asian trade, the pound fell 0.61% to $1.2910, having hit a five-month peak of $1.2990 on Friday and closing the week just below the $1.30 mark, a 6.5% surge since Johnson struck an EU divorce deal on Oct. 10. Lawmakers on Saturday voted to withhold a decision on Johnson’s deal, a move that forced him to seek from the EU a third postponement of Britain’s departure from the bloc. Britain’s exit had been envisaged for Oct. 31. But Johnson added another note saying he was opposed to an extension and British government minister Michael Gove said on Sunday that Brexit will happen by Oct. 31 as the government seeks to get the Brexit bill through parliament.


Analysts said market focus will turn to this week’s vote on Johnson’s deal. Foreign Secretary Dominic Raab told the BBC overnight that he was confident enough lawmakers would back the deal this week. “The weekend’s events, if anything, have further reduced the risk of disorderly exit,” said Adam Cole, chief currency strategist at RBC Capital Markets in London. “If there is a knee-jerk negative reaction in the pound as we emerge from the weekend with a greater overhang of uncertainty than hoped and some of the long positions are unwound, it should be faded soon.” The European Union will play for time rather than rush to decide on London’s reluctant request to delay Brexit again, diplomats said on Sunday. While weary of the Brexit process, EU leaders are keen to avoid a disorderly exit and are unlikely to reject the request. They hope the deal can eventually be approved in London. Goldman Sachs said on Sunday that it lowered the probability of a no-deal Brexit to 5% from 10% and maintained its baseline view that the UK will leave the EU on Oct. 31. “The uncertainty is likely to weigh on sterling when trading resumes in Asia Pacific on Oct. 21. Volatility will remain elevated until a clearer picture emerges,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. Implied volatilities on sterling options were mostly little changed in early Monday, with one-month volatilities quoted at 11.600/14.200%. Risk reversal spreads widened slightly in favour of sterling puts, pointing to investors’ caution over the pound’s fall. Elsewhere, currency moves were limited as investors pondered the shifting scenarios for Brexit. The euro eased 0.13% to $1.1159 versus the greenback, off Friday’s two-month high of $1.1172. The dollar was little changed at 108.48 to the safe-haven yen, still not far from its 2-1/2-month high of 108.94 yen marked on Thursday. “Although many eyes are still on Brexit, there is not so much nervousness in the market as the risk of a no-deal Brexit has actually reduced over the weekend,” said Shinichiro Kadota, senior forex and rates strategist at Barclays in Tokyo. “Apart from Brexit, traders are looking at central banks’ policy decisions.” A big week for central banks kicks off on Thursday with the European Central Bank meeting, the last one for President Mario Draghi, while the main focus is on the U.S. Federal Reserve’s policy meeting on Oct. 29-30. China’s yuan was a touch firmer at 7.0680 per dollar after Beijing unexpectedly kept unchanged its new benchmark lending rate on Monday, for the first time since its debut in August, suggesting the country is keen to avoid overly loosening monetary policy.

 

US Dollar

Bloomberg: The dollar’s three-week slump may turn into further weakness through early next year, as potential progress on U.S.-China trade talks and Brexit along with softer domestic economic data undermine the currency’s haven status, said Scotiabank’s Shaun Osborne. The Bloomberg Dollar Spot Index is down about 2% from a two-year high reached Oct. 1, amid its longest weekly losing streak since January. It touched the lowest since July on Friday as Federal Reserve Vice Chairman Richard Clarida left the door open to a third straight rate cut later this month, saying the central bank will “act as appropriate” to sustain the expansion amid “evident” risks. The greenback’s biggest losses in October have come against the pound, as U.K. and European Union negotiators reached a Brexit deal. This month also brought a potential breakthrough in trade talks between the U.S. and China, though President Donald Trump said an agreement probably won’t be signed until he meets his Chinese counterpart Xi Jinping in November.


“One of the things that kept the U.S. dollar supported broadly over the past few months was the idea of uncertainty in Trump’s policies, which sent investors to U.S. dollar-denominated assets like Treasuries and propped up the dollar,” Osborne, a currency strategist, said in an interview. Progress on trade talks this month “took the edge off” the dollar, along with a string of U.S. data that missed estimates, such as manufacturing and industrial production, he said. In addition, “investors are facing losing bets on more recently established long positions on the dollar or shorts on the euro and pound.”

 

South African Rand

EWN: The rand firmed on Friday, building on gains made after the government released a long-delayed plan for electricity generation to address crippling power cuts. At 1620 GMT, the rand was up 0.3% at R14.7900 per US dollar. The South African currency rallied from near R15.00 to a session-best R14.77 on Thursday, ending a losing streak triggered by state power utility Eskom’s resumption on Wednesday of nationwide controlled blackouts. Eskom has blamed unforeseen breakdowns at some of its coal-burning plants, but analysts say they are a symptom of mismanagement over many years, which has seen it sink into roughly R440 billion ($30 billion) of debt. The release of the new electricity generation plan, replacing a previous blueprint not updated for almost a decade, gave investors a degree of policy certainty, but Eskom still does not have a permanent chief executive.


South African government bonds traded slightly firmer, with the yield on the benchmark government paper due in 2026 down 2 basis points at 8.24%. Stocks closed weaker, with the Johannesburg All-share index down 0.48% to 55,723 points, while the benchmark Top-40 index declined 0.41% to 49,511 points. Bank stocks fell as the index edged 1.24% lower. FirstRand slipped 1.89% to R65.99, Standard Bank shed 1.44% to 179.20 rand and Rand Bank Merchant lost 1.02% to R80.17. Gold stocks shone with the index up 1.76% amid global market uncertainty. Harmony rose 3.41% to R46.96 and AngloGold America 2.02% to R306.70. On Monday morning, at 0430 GMT the rand was trading at R14.74 to the dollar, R16.45 to the euro and R19.03 to the pound.

 

Global Markets

Reuters: Asian stocks edged higher on Monday as Chinese shares reversed early losses due to hopes for progress in resolving the U.S.-China trade war and expectations for greater investment inflows into Hong Kong. MSCI's broadest index of Asia-Pacific shares outside JapanS rose 0.19%. Chinese shares rose 0.13%, while Japan's Nikkei rose 0.28%. The pound slipped from a five-month high against the dollar and the euro after the British parliament forced Prime Minister Boris Johnson to seek a delay to an Oct. 31 deadline for Britain’s departure from the bloc. The vote for an extension dealt a blow to optimism that a deal agreed last week would ensure Brexit happens with little economic disruption. Oil futures fell as lingering economic growth concerns and excess supplies of crude prompted speculators to trim their long positions. Chinese vice premier Liu He said on Friday that China will work with the United States to address each other’s concerns, and that stopping the trade war would be good for both sides and the world. 


Shares in Hong Kong also got a lift after Chinese bourses revised rules to allow mainland investors to buy Hong Kong-listed dual-class shares for the first time. “We’ve had some positive news from Liu, and allowing Chinese investors direct access to dual-listed Hong Kong shares is a another positive,” said Sean Darby, global equity strategist at Jefferies in Hong Kong. “There is still a lot of money on the sidelines, and there are only eight or nine weeks left to put that money to work before we end the year. I expect markets to remain bid.” U.S. stock futures rose 0.27% in Asia as investors brace for high-profile earnings this week from Microsoft Corp, Amazon.com and others. The S&P 500 fell 0.4% on Friday partly due to worries about fallout from the U.S.-China trade war. A 15-month long trade war between the United States and China has shown few signs of a durable resolution being reached despite several rounds of talks. Financial markets have been whipsawed over this period as a steady increase in tit-for-tat tariffs have slowed global trade and raised the risk of recession for some countries. Underscoring the damage, Japan’s exports fell in September for the 10th straight month, while South Korea’s exports for the first 20 days of October dived 19.5% year-on-year, data on Monday showed. Hong Kong shares erased early losses to rise 0.26%. Chinese bourses on Friday revised rules that would allow Hong Kong-listed dual-class shares to be included in the Stock Connect scheme for the first time, potentially benefiting popular tech companies such as Xiaomi Corp and Meituan Dianping. The rule change, which will take effect on Oct. 28, could be a positive for Hong Kong shares, which have been battered during months of often violent protest against Chinese rule of the former British colony. Elsewhere in the currency markets, the dollar edged 0.1% higher to $1.1157 per euro but held steady at 108.49 yen. U.S. crude dipped 0.24% to $53.65 a barrel. Brent crude fell 0.34% to $59.22 per barrel. Money managers cut their net long U.S. crude futures and options positions in the week to Oct. 15, the U.S. Commodity Futures Trading Commission said on Friday. Long bets on U.S. crude have dropped sharply in the last two weeks after a spate of weak economic figures worldwide fanned concerns about global energy demand. Treasury prices fell in Asia. The yield on benchmark 10-year Treasury notes rose to 1.7554%. Gold, often considered safe-haven asset, was little changed at $1,490.12 per ounce.

HONG KONG OFFICE

 

British Pound

FXStreet:  GBP/USD gradually declines from Friday’s high. The UK Parliament’s special session failed to clear the Brexit fog as Letwin Amendment took over the meaningful vote. Withdrawal Agreement (WA) Bill will be discussed during the week. GBP/USD witnesses a negative week start as the Brexit uncertainty weighs over the Cable. The pair declines to 1.2920 by the press time of early Asian morning on Monday.

 

With the United Kingdom’s (UK) Parliament preferring Letwin Amendment over the discussion and voting on WA bill, all efforts done by the Prime Minister (PM) Boris Johnson to get the deal went in vain. As a result, the Tory leader had to write the EU for another Brexit extension from October 31 deadline. However, tweets from The Times’ editor suggest the European Union (EU) is less in the mood to give another longer extension except for a three month period. Elsewhere, the Telegraph’s political correspondent Harry Yorke mentions that the Democratic Unionist Party (DUP), together with few Labour, independent and Tory backbenchers, is up for questioning the bill in the Parliament over the customs union.

 

Furthermore, the French government seems to hate the UK’s Brexit extension as the UK Telegraph mentions, “The French government has demanded a prompt "yes or no" from Britain over Boris Johnson's Brexit deal as European capitals appeared split on Sunday night over an extension and its duration. Amelie de Montchalin, Emmanuel Macron's European affairs minister, on Sunday urged MPs to deliver a verdict so that European leaders can gather to discuss whether to grant a delay.” Investors will keep an eye over the trade/Brexit headlines to determine near-term pair moves as the economic calendar is light.

 

April low nearing 1.2865, followed by June top close to 1.2785, seem nearby key supports for the pair, a break of which can recall a 200-day Simple Moving Average (SMA) level of 1.2715. On the upside, 1.3000 holds the top spot on the buyers’ radar.

 

US Dollar

Reuters: Sterling fell over half a percent against the dollar on Monday, slipping from five-month highs after the British parliament delayed a crucial vote on a Brexit withdrawal agreement. The move derailed Prime Minister Boris Johnson’s plan for a decision on his withdrawal deal, but the pound held the bulk of its recent rally on confidence that a disorderly exit from the European Union would be avoided.

 

U.S. stock futures nudged 0.06% higher in Asia as investors brace for high-profile earnings this week from Microsoft Corp (MSFT.O), Amazon.com (AMZN.O) and others. The S&P 500 fell 0.4% on Friday partly due to worries about fallout from the U.S.-China trade war. A 15-month long trade war between the United States and China has shown few signs of a durable resolution being reached despite several rounds of talks. Financial markets have been whipsawed over this period as a steady increase in tit-for-tat tariffs have slowed global trade and raised the risk of recession for some countries. Underscoring the damage, Japan’s exports fell in September for the 10th straight month, while South Korea’s exports for the first 20 days of October dived 19.5% year-on-year, data on Monday showed.

 

Elsewhere in the currency markets, the dollar edged 0.1% higher to $1.1158 per euro but held steady at 108.45 yen as investors pondered the shifting scenarios for Brexit. U.S. crude fell 0.45% to $53.54 per barrel. Money managers cut their net long U.S. crude futures and options positions in the week to Oct. 15, the U.S. Commodity Futures Trading Commission (CFTC) said on Friday. Long bets on U.S. crude have dropped sharply in the last two weeks after a spate of weak economic figures worldwide fanned concerns about global energy demand.

 

Japanese Yen

FXStreet: USD/JPY has been steady in the open in quite data week. Bears looking to Brexit noise to trigger a run to safety, In a quiet-looking global calendar for the week ahead, it is relatively quiet out there and USD/JPY has been steady in the open. The pair dropped from a 108.70 to 108.40 low on Friday, today slightly bid, opening at 108.29 and ending up at 108.48 for the high so far. Financial markets were focused on Brexit in the final days of the week, albeit the Chinese Gross Domestic Produce disappointment was also a weight on risk appetite. All in all, stocks were underperforming into the close with the S&P 500 off by 0.4%, while the DAX was down 0.2% and the FTSE 100 was off 0.4%. 

 

Valeria Bednariik, the Chief Analyst at FXStreet, explained that the USD/JPY pair has settled a few pips above the 23.6% retracement of its latest daily advance, which limits the chances of a bearish extension: "Brexit noise could trigger a run to safety, in which case, the market will be looking at the price´s behaviour around the 38.2% retracement of the same rally at 108.00. Meanwhile, the daily chart shows that the pair was unable to surpass its 200 DMA, but it holds above the shorter ones. Technical indicators have eased, retaining their bearish slopes within positive levels. In the 4-hour chart, readings favor a downward extension, as the pair has settled below a now flat 20 SMA, while technical indicators head south within negative levels."

 

Global Markets

Reuters: Asian stocks were steady in a cautious start to the week on Monday, while the British pound fell following a delay to a crucial vote on Britain’s divorce from the European Union. MSCI's broadest index of Asia-Pacific shares outside Japan were flat, with Australian shares off down 0.3%. Japan's Nikkei rose 0.13%. The Brexit maelstrom, worries over slowing global growth and international trade frictions have kept investors on edge over recent months. Oil futures fell as lingering economic growth concerns and excess supplies of crude prompted speculators to trim their long positions.

 

The pound slipped from a five-month high against the dollar and the euro after the British parliament forced Prime Minister Boris Johnson to seek a delay to an Oct. 31 deadline for Britain’s departure from the bloc. The vote for an extension dealt a blow to optimism that a deal agreed last week would ensure Brexit happens with little economic disruption. While the British government insisted Brexit will take place on Oct. 31, uncertainty over whether the EU will agree a delay and how British lawmakers will respond could weigh on sentiment over the week.

 

“There is some uncertainty about Brexit, but it may not rattle investors too much because this is not an outright rejection of the deal,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney. “Trading volumes are around 40% of what they would normally be, which shows there’s not a lot of conviction in the market.” The pound fell 0.7% to $1.2908 and was off about 0.4% to 86.50 per euro. Gold, another safe-haven asset, edged 0.11% higher to $1,491.28 per ounce.

 

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