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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.

 

12 / 05 / 21

 

British Pound

Reuters: Sterling steadied above $1.41 on Tuesday after posting its best day against a weakening dollar at the start of the week, buoyed by market relief over the Scottish election results, improved economic forecasts, and lockdown easing measures. Analysts say the election outcome - in which the Scottish National Party did not secure an outright majority - was a relief for the currency, which had been trading away from its fair value against the euro owing to the election uncertainty. 


Pro-independence parties together won a majority in Scotland’s parliament on Saturday, which Scottish leader Nicola Sturgeon said gave her a mandate to pursue plans for a second independence referendum. Any second referendum on Scottish independence requires the approval of the British government and Prime Minister Boris Johnson has ruled this out. “As we have argued previously, the Scottish elections were not supposed to have a long-lasting negative impact on the pound and the pound rally yesterday provided a case in point,” said Petr Krpata, chief EMEA FX and IR strategist at ING. “With the UK government confirming the next step of the reopening of the economy, the solid UK data points this quarter should benefit sterling.”


By 1525 GMT, sterling was 0.2% higher against the dollar at $1.4152, just shy of the 2-1/2-month peak of $1.4158 hit on Monday. Against the euro, the pound traded 0.1% lower at 85.97 pence, off a one-month high of 85.88 pence per euro touched on Monday. “Euro-sterling moved a full figure lower yesterday to below 86 pence, as investors moved beyond the Scottish Parliament election,” said Mikael Olai Milhøj, chief analyst at Danske Bank. “Another Scottish independence referendum is far away and hence not something markets will trade on near-term.” Sterling is the third best performing G10 currency against the U.S. dollar year-to-date, trailing the commodity-linked Norwegian crown and the Canadian dollar. As of the end of Monday, sterling was up 3.4% this year against the greenback.


The pound has also benefited from the Bank of England beginning to taper its bond purchasing programme last week, on the back of an improving economic outlook. Prime Minister Boris Johnson confirmed on Monday that England could continue to the next stage of his four-step plan to bring the country out of lockdown by the summer, as the COVID-19 situation has improved thanks to the rollout of vaccines and social restriction measures. CFTC positioning data showed speculators reduced their net long position on the pound in the week to May 4. CitiFX analyst Adam Pickett said a UK reopening is “far from priced in” despite “vaccine exceptionalism”, noting that the pound against the dollar looked underpriced relative to a proprietary “UK reopening” basket. “This comes despite the UK reopening timeline remaining unchanged despite delays elsewhere in G10. The UK should also retain its position as a COVID recovery play given the autumn timeline for booster shots and leadership in mutation sequencing,” Pickett said.

 

US Dollar

Reuters: The U.S. dollar hovered near a 2-1/2-month low versus major peers on Wednesday, as traders hung on to bets that the Federal Reserve would remain steadfast in its easy policy settings ahead of data expected to show a sharp rise in annual U.S. inflation. Analysts forecast figures due at 1230 GMT to show a 3.6% lift in year-on-year prices, boosted by last April's low base. The month-on-month forecast is for a modest 0.2% rise. Higher numbers might add pressure on the Fed to bring forward rate rises, a worry which has contributed to a selloff in rate-sensitive tech shares this week. But currency markets have been soothed by repeated promises of patience from Fed speakers and the dollar has been pressured by gains in commodity currencies.


The greenback touched its weakest in more than two months against the euro overnight, following a strong European growth survey, and it traded just shy of that level at $1.2126 in Asia. The yen fell 0.2% to 108.835 per dollar. Risk aversion helped a gauge of the safe-haven dollar a fraction higher to 90.278 as selling pressure persisted in stock markets, but that still left the dollar index just above key support around 89.677 and 89.206. Commodity currencies cooled their heels near milestone peaks, with the Aussie and kiwi sliding 0.5% to sit just below recent ten-week tops, while the Canadian dollar was little changed just shy of Tuesday's almost four-year high. Sterling clung to recent gains to trade at $1.4118.


"As long as the equity market doesn't experience a more drastic correction, the dollar is unlikely to get a safe-haven bid," said Rodrigo Catril, a senior currency strategist at National Australia Bank in Sydney. "We know now that the Fed is very much firmly committed to easy policy," he said, a view reinforced by recent comments from Fed members that have made Dallas Fed President Robert Kaplan's mention of tapering support last month look like an outlier. "Everybody else has come out firmly saying it's not the time...and that's a dollar negative story." St. Louis Federal Reserve President James Bullard said on Tuesday he expects inflation could stay as high as 2.5% next year, while Fed Governor Lael Brainard said weak labour data last week shows the recovery has a long way to run. "Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals as some current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions," she said. read more


Nominal U.S. yields crept higher with the focus on inflation, but real yields remain negative and under pressure. The U.S. currency is also being weighed down by the improving global growth outlook, which tends to draw investors' cash to emerging markets, and by big and growing U.S. trade and current account deficits which also send dollars abroad. The dollar index is "finding some risk aversion-related stability just above 90" amid the sell-off in equities, "but it’s unlikely to morph into any meaningful upside," Westpac strategists wrote in a report. "Fedspeak continues to underscore the patient pledge," while the "eurozone's rebound metrics continue to close the gap with the U.S.," keeping the dollar index heavy through the next several months, they said. 

In the digital space, cryptocurrency ether rose about 4% to a record $4,358.38, bringing its gain this month to 56%. That's as bigger rival bitcoin remains stuck below $60,000, nearly a month after setting an all-time peak at $64,895.22. It last traded around $57,471.20.

 

South African Rand

Reuters: South Africa's rand touched a 16-month high against the dollar on Tuesday afternoon, helped by manufacturing figures that were far stronger than expected. At 1555 GMT, the rand was at 13.9825 against the dollar, 0.25% stronger than its previous close. The rand moved below 14 to the dollar for the first time since early January 2020 on Monday and posted further gains on Tuesday. Factors driving it higher include strong prices for metals the country exports, expectations that U.S. interest rates will not rise any time soon and signs that reform-minded President Cyril Ramaphosa is asserting his authority in the governing party.


Manufacturing output rose 4.6% year on year in March, data showed on Tuesday, outperforming the 0.45% increase forecast in a Reuters poll. Government bonds firmed slightly, with the yield on the 2030 instrument dipping 2 basis points to 8.96%. But the Johannesburg Stock Exchange posted its biggest daily percentage fall in three weeks, with some investors concerned about rising U.S. Treasury yields. The all-share index shed 1.66% to 67,241 points and the blue-chip index fell 1.71% to 61,320. "If U.S. risk-free government bonds slowly reach 2% then why would you go to emerging market stocks and take all the risk? ...it is this sort of fear that occasionally grips the market," said Greg Davies, a trader at Cratos Capital. Banks fell less than most, with the banking index down 0.4%. Mining and industrials fell 2.6% and 1.7%, respectively.

 

Global Markets

Reuters: An extended sell-off drove Asian shares to their lowest in seven weeks on Wednesday as surging commodity prices and growing inflationary pressure in the United States prompted markets to bet on earlier rate hikes and higher bond yields globally. Futures pointed to a gloomy start for European and U.S. shares with those of Eurostoxx 50, Germany’s Dax and London’s FTSE all down 0.2% each. E-mini futures for the S&P 500 stumbled 0.4% while futures for the tech-heavy Nasdaq were down 0.6%. MSCI’s broadest index of Asia-Pacific shares outside Japan slumped 1.5% to the lowest since March 26, adding to Tuesday’s 1.6% loss with all major indices under heavy selling pressure.


Analysts said a combination of inflation fears and some investors cutting their exposure to over-stretched stocks or sectors was behind the recent downturn. At 678 points, the regional index is not too far from a record high of 745.89 touched in February and is still up 3% this year so far, on top of a 19% jump in 2020 and a near 16% rise in 2019. Australian stocks slipped 0.9% while South Korea’s KOSPI index skidded 1.4%. Japan’s Nikkei reversed early gains to be down 1.5%. China’s blue-chip share index was little changed. Taiwan’s benchmark index plunged 6% from all-time highs to levels seen in February on fears it may raise its COVID-19 alert level in coming days, which would lead to closure of shops dealing in non-essential items as infections rise. Analysts, however, doubted the broader equities sell-off would extend much further in a world of easy accommodative policy and fiscal largesse.


“Despite the severity of the moves, we sensed limited panic in our client conversations with many using the weakness as an opportunity to buy the dip, particularly in the value orientated areas e.g. banks, energy and insurance,” JPMorgan analysts wrote in a note. Overnight on Wall Street, technology stocks were among the biggest losers though the tech-focused Nasdaq reversed the bulk of its early 2% decline over the course of the day. The Dow dropped 1.4% and the S&P 500 fell 0.9%. The equity rout barely helped drive any safe haven flows into the greenback even as futures pointed to yet another negative open for Wall Street. “What is unusual about the last two days is that the equity-market angst did not provide the U.S. dollar with a notable lift,” said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets. Tan said there was no sign of “risk-off” among regional currencies either with the high-carry Indian rupees and Indonesia rupiah largely holding their ground. “Still, it is not yet obvious if this signifies a new market paradigm. As they say, one swallow does not make a summer,” Tan added.


All eyes are now on the U.S. consumer price index report to be released by the U.S. Labor Department on Wednesday with market-based measures of inflation expectations having moved higher . “Prices are definitely on the increase and this is evident across a wide range of sectors and geographies. What is less clear is the longevity of the increase in prices,” ANZ analysts wrote in a note. Treasury yields have remained stuck to a tight range. The yield on benchmark 10-year Treasuries drifted lower to 1.6217%, a far cry from the 2% level seen in before the coronavirus pandemic. The U.S. Federal Reserve expects higher inflation though officials have pointed to transient factors and base effects for the temporary rise. “The upshot is the Fed remains far away from achieving its aim of average inflation of 2% per year. The Fed’s ultra-accommodative monetary policy is part of the reason why we consider the USD downtrend is intact,” said Commonwealth Bank of Australia analyst Carol Kong.


The dollar was up 0.2% against the Japanese yen at 108.84 as it meandered in a narrow 107-110 band. The dollar index, which measures the greenback against six major currencies, was a shade higher at 90.335, after touching a two-month low of 89.979. The currencies of major natural resource suppliers such as Canada have been buoyant amid rising commodity prices. The loonie held near a 3-1/2-year high of C$1.2078. The Australian dollar, another proxy for commodity prices, was not far from a 10-week high of $0.7891 struck on Monday. The Aussie, which is also played as a liquid proxy for risk, did falter in afternoon Asian trading to $0.7790. Oil prices were higher with U.S. crude rising 13 cents at $65.41 a barrel. Brent crude slipped 10 cents to $68.65 per barrel. Spot gold was off slightly at $1,829 an ounce. In cryptocurrencies, ether hit a fresh record high touched on Monday to be at $4,349.44. The value of the second-biggest digital token has surged over 5.5 times so far this year.

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