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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.

 

24 / 06 / 19

 

LONDON OFFICE

 

British Pound

Reuters: Sterling on Friday slipped to a whisker off recent five-month lows against the euro after Brexiteer Boris Johnson moved closer to becoming British prime minister, worrying investors that his government would make a no-deal Brexit more likely. It eased versus the dollar as well but stayed on course for a weekly gain against the greenback after the Bank of England stuck to its message that interest rates would need to rise, contrasting with the U.S. Federal Reserve which is now expected to cut rates from July. After a busy week for monetary policy, sterling traders will turn their attention back to British politics and the Conservative Party leadership contest. Johnson faces foreign minister Jeremy Hunt in a contest to succeed Theresa May as party leader and prime minister, with Johnson the odds-on favourite to secure a majority of votes from the Conservative Party. The new leader will be chosen by a ballot of party members, with the result due next month.


Whoever triumphs, the new prime minister will try to wring a tweaked Brexit withdrawal deal more palatable to British politicians from a sceptical Brussels that has said there will be no further negotiation over the agreement. The current deal has been rejected three times by the British parliament, and if Johnson or Hunt cannot get it or another version passed, investors worry Britain will leave the European Union on Oct. 31 without transitional trading arrangements in place with its largest trading partner. “Johnson is the firm favourite and based on our scenario analysis of a Johnson leadership, GBP could run into trouble this autumn,” ING analysts said in a note. Sterling was trading flat by 1600 GMT at $1.2697. That still left the British currency up 0.7% for the week, with most of the gains down to a selloff in the dollar after the Fed opened the door to looser monetary policy. But the pound has not fared as well against the euro, and was down 0.3% at 89.18 pence. It traded at 89.74 pence on Tuesday, the highest since January. Sterling has lost 4% against the euro since May 1, as investors price in a greater risk of a no-deal Brexit. Some analysts reckon the currency will enjoy some support, given the BOE hasn’t yet made the dovish pivot seen in the United States and euro zone. “We think that sterling weakness over the last few weeks has been overdone. We expect a rebound of sterling/dollar to $1.32, from $1.27 over three months,” UBS analysts said.

 

US Dollar

Reuters: The dollar fell on Friday to three-month lows against a basket of currencies on bets the Federal Reserve would start lowering interest rates, while the yen rose to a five-month high versus the dollar on growing tensions between Iran and the United States. The greenback’s weakness propelled the euro to three-month highs. The single currency was also buoyed by stronger-than-forecast survey data on French and German business activity. The dollar extended its losses for three straight sessions since the Federal Reserve on Wednesday signalled it was prepared to lower interest rates later this year. The Fed and the European Central Bank this week hinted they were open to ease policies to counter a global economic slowdown, exacerbated by global trade tensions. “Now it’s going to be a horse-race between the Fed and ECB on policy easing,” said Ed Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle Investments in Minneapolis.


The focus now shifts to whether Washington and Beijing can resolve their trade dispute at a summit in Japan next week of leaders from the Group of 20 leading world economies. U.S. President Donald Trump and Chinese President Xi Jinping are due to meet at the G20 next weekend, but analysts say chances of a decisive breakthrough are low. The greenback was 0.67% lower at $1.1368 per euro after touching $1.1334, the lowest since March 22. Against a basket of currencies, the dollar was 0.42% lower at 96.219 after hitting 96.204, the lowest since March 21. The dollar enjoyed a brief respite on news of stronger-than-forecast sales in U.S. existing homes in May. The encouraging news offset IHS Markit data that showed manufacturing growth weakened to its most sluggish level since September 2009 in June, while services sector activity slumped to its lowest level since February 2016. Friday’s U.S. data did not change traders expectations the Fed would lower key lending rates, as early as July. They priced in the probability policy-makers will have reduced rates by at least 75 basis points by year-end, based on calculations by CME Group’s FedWatch tool on its interest rates futures. Meanwhile, Iran’s downing of an unmanned U.S. surveillance drone stoked fears about a military conflict between the two nations following a spate of attacks on oil tankers in the Gulf region. An initial wave of safe-haven buying of the yen faded following news that Trump shelved a missile strike against Iran and preferred dialogue with Tehran, especially over its nuclear program.  “The Iranians for their part refused the overture for now, so tensions remain high, but the risk of conflict appears to have eased,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. The yen moved to 107.045 per dollar during Asian trading, which was its strongest level since Jan. 3. It was last down 0.08% at 107.4 yen per dollar.

 

South African Rand

BDL: The rand was firmer on Friday afternoon, looking set for its best week against the dollar in nine months. The local currency has gained more than 3% against the dollar since Sunday, benefiting from talks of possible rate cuts in the US and the eurozone. The US Federal Reserve kept interest rates unchanged after a two-day federal open market committee meeting this week. However, Fed chair Jerome Powell said that uncertainties such as the US-China trade war and weak inflation could call for accommodative monetary policy. European Central Bank (ECB) president Mario Draghi said earlier this week that the ECB might loosen monetary policy, should inflation remain subdued. The comments by leaders of the major central banks buoyed the rand, which reached a best level of $14.19/$ on Thursday. By 2pm, the rand had strengthened 0.12% to R14.3255/$ and 0.49% to R18.1338/£, while it had weakened 0.1% to R16.2092/€. The euro was up 0.22% to $1,1315.


The benchmark R186 government bond was weaker, with its yield rising 9.5 basis points to 8.135%. Bond yields move inversely to bond prices. The market found little comfort in President Cyril Ramaphosa’s state of the nation address (Sona) on Thursday evening, as investors wait for more detail on economic policy. “Ramaphosa provided essentially no policy detail in Thursday’s ambitious state of the nation speech. Indeed, he seems to have walked back his plan of a relatively modest restructuring of the state’s failing energy firm,” John Ashbourne, senior emerging-markets economist at Capital Economics said in a note. “This suggests to us that divisions within the ruling party are holding back reforms.” Gold was last up 0.51% to $1,395.28/oz, peaking above $1,400 in intraday trade, while platinum was down 0.1% to $805.36. Brent crude gained 1.51% to $65.26 a barrel, amid concerns over the growing tension between the US and Iran.

 

Global Markets

Reuters: Oil prices added to recent gains on Friday on fears any U.S. military attack on Iran would disrupt flows of crude from the Middle East, while a gauge of global stock markets edged back from seven-week highs following a run-up spurred by optimism over monetary policy. Gold prices rose to near six-year highs. The dollar fell to a three-month low against a basket of currencies. Central banks have dominated economic news this week, with the Federal Reserve signaling the potential for a U.S. interest rate cut later this year and the European Central Bank hinting at stimulus measures. MSCI’s gauge of stocks across the globe shed 0.10%, after a day earlier reaching its highest since May 1. U.S.-China trade tensions were also in focus ahead of an expected meeting between the countries’ two leaders next week at a G20 meeting in Osaka, Japan. U.S. stocks were supported by news that U.S. Vice President Mike Pence called off a planned China speech that had been initially cast as a sequel to a blistering broadside he delivered in October, a move aimed at averting increasing tensions with Beijing.


“Having an accommodative interest rate outlook is a positive for the markets, but now investors are looking for direction on trade,” said Christopher O’Keefe, portfolio manager at Logan Capital Management in Ardmore, Pennsylvania. “For the market to meaningfully move forward from here you have to have some positive outcome on trade.” On Wall Street, the Dow Jones Industrial Average fell 33.84 points, or 0.13%, to 26,719.33, the S&P 500 lost 3.68 points, or 0.12%, to 2,950.5 and the Nasdaq Composite dropped 19.63 points, or 0.24%, to 8,031.71. The pan-European STOXX 600 index lost 0.36%. Trump said he had aborted a military strike on Iran because such a response to Tehran’s downing of an unmanned U.S. surveillance drone would have caused a disproportionate loss of life. Spot gold added 0.8% to $1,399.05 an ounce, surpassing the $1,400 level during the session. “There is a perfect mix of ingredients for gold’s rush to the top - a weak macroeconomic environment, low bond yields, soft dollar and rising geopolitical tensions,” said Howie Lee, an economist at OCBC Bank. Oil futures rallied on fears of disruption to flows in the Middle East, which provides more than a fifth of the world’s oil output. U.S. crude settled up 0.6% at $57.43 a barrel, and Brent settled at $65.20, up 1.2%. Government bond yields in the United States and Europe rose but remained near record or multi-year lows after the dovish statements from the central banks. Benchmark 10-year U.S. Treasury notes last fell 17/32 in price to yield 2.0591%, from 2.001% late on Thursday. The dollar index, which measures the greenback against a basket of currencies, fell 0.44%, falling to a three-month low, with the euro up 0.66% to $1.1366.

HONG KONG OFFICE

 

Euro

Reuters: The euro rose to a three-month high against the dollar on Monday, as bearish bets on the U.S. currency remained solid on prospects of a near-term interest rate cut by the Federal Reserve. The euro stretched its rally last week, up 1.4%, and advanced about 0.15% to $1.1386 in early Asian trade, its highest since March 22. 


That weighed on the dollar and in turn reinvigorated its counterparts like the euro, which has had troubles of its own including Italy’s debt problem and the possibility of the European Central Bank having to ease policy. “It is true that the ECB may have to ease policy especially with the Fed having shifted to an easing bias,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities. “But the ECB already employs a negative interest rate policy and does not have much further room to ease even if they wanted to, unlike the Fed. It is factors like these which have seemingly supported the euro.” 

 

US Dollar

Reuters: The dollar index versus a basket of six major currencies was a shade lower at 96.135, having struck 96.093 on Friday, its lowest since March 21, after the Fed last week opened the door for a potential rate cut as early as next month. The dollar nudged up 0.1% to 107.400 yen after retreating to a near six-month low of 107.045 on Friday. 


The U.S. currency was pressured even more against the yen, which often serves as a safe haven in times of political angst, as tensions grew between Iran and the United States. Also in focus was whether Washington and Beijing can resolve their trade dispute at a summit in Japan this week of leaders from the Group of 20 leading world economies. 


The Australian dollar was up 0.4% at $0.6952 after Reserve Bank of Australia Governor Philip Lowe said it would be legitimate to question the effectiveness of global monetary policy easing to boost economic growth. The comments were perceived to be slightly less dovish as just last week Lowe said a recent cut in Australia interest rates to an all-time low of 1.25% would not be enough to revive economic growth. 

 

Japanese Yen

FXStreet: USD/JPY is under pressure and in 5 month lows. In a tight range to start the week, USD/JPY is flat around 107.30 in Tokyo, up from 107.05 from Friday's business but below 107.75 highs. The yen has picked up a safe haven bid and flows out of the greenback.


The daily chart for the USD/JPY pair shows that it topped Friday at around the 38.2% retracement of the weekly decline at around 107.70, but trimmed gains ahead of the close to settle below the 23.6$ retracement of the same drop. The pair is developing below a firmly bearish 20 SMA which keeps heading lower well below the 100 and 200 SMA. 


Early Monday, Japan will release the final version of the Leading Economic Index and the Coincident Index, expected to remain as initially estimated at 95.5 and 101.9 respectively.

 

Global Markets

Reuters: Asian shares were off to a cautious start on Monday as investors pinned their hopes on any signs of a thaw in Sino-U.S. trade negotiations while oil prices firmed on worries over heightened tensions between the United States and Iran. 


MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.16% in early trade while Japan’s Nikkei ticked down 0.26%. The Chinese state-run Xinhua news agency said on Sunday China’s President Xi Jinping will attend the G20 summit in Japan this week, giving the first official confirmation of his attendance at a gathering where he is expected to meet U.S. President Donald Trump. The news came after U.S. Vice President Mike Pence on Friday decided to call off a planned China speech, which also increased optimism on upcoming trade talks with Beijing. Pence had upset China with a fierce speech in October in which he laid out a litany of complaints ranging from state surveillance to human-rights abuses. 


Oil prices held firm near three-week highs hit last week after the United States and Iran came to the brink of war following Iran’s shooting down of an unmanned U.S. surveillance drone. Brent crude futures rose 0.6% to $65.58 per barrel, near Friday’s three-week high of $65.76. U.S. crude futures were up 0.75% at $57.88 per barrel. The precious metal stood at $1,406.2 per ounce, near Friday’s six-year high of $1,411.2.

 

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