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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 / 10 / 20

 

LONDON OFFICE

 

British Pound

Reuters: Sterling soared on Wednesday to a six-week high and 1.7% on the day against the U.S. dollar after a Bloomberg report that Brexit negotiations were due to start again after halting abruptly last week. The report also said Britain and the European Union would aim to reach a new trade deal by mid-November. “There has definitely been a narrowing in the gap since the UK shut the door last Friday. This is a positive and indicates that a deal is still more likely than not, though we would be cautious about assuming anything at this stage,” said Neil Wilson, chief market analyst for Markets.com. The pound was on an uphill trajectory already on Wednesday after EU Brexit negotiator Michel Barnier told EU lawmakers a trade deal with Britain was still possible. Barnier said a deal was “within reach” if both sides work hard to overcome the sticking points in the coming days. “Time is of the essence ... Along with our British counterparts, we must find solutions to the most difficult areas,” he told the European Parliament.


The pound was last at $1.3165, its highest since Sept. 8. The British currency also rose 1.2% against the euro to 90.25 pence. The EU and Britain have exhorted each other this week to compromise to avoid a disruptive finale to the Brexit drama that would add to economic pain from the coronavirus crisis. Kenneth Broux, head of corporate research at Societe Generale, said Barnier’s tone had given eager traders a reason to buy. “The market doesn’t sit there thinking ‘there isn’t going to be a deal, we should be trading at $1.25’. The market wants to rally. Any positive soundbites that do come out are being jumped on as a reason to buy,” Broux said. Trading bots or ‘algos’ responding to the news story may also have helped push the pound higher, he said, while positive Brexit news could prompt hedge funds to offload some of their sterling short positions as well, adding to gains. The rejection by the UK parliament’s upper house of draft legislation that has infuriated the EU because it would give the British government the right to override parts of their Brexit Withdrawal Agreement had given the pound an early boost. The Internal Market Bill would have broken the law, the House of Lords said. Analysts said that could aid negotiations. “Despite all the recent Brexit noise, we still expect a ‘thin’ agreement at the last minute,” said Christopher Dembik, head of macro analysis at Saxo Bank. “At the end of the day, we think the currency market is right, there will be a deal.” A post-Brexit transition arrangement expires in 10 weeks, on Dec. 31. Broux saw a 50-50 chance of a deal being struck, probably by the end of November. Britain is also dealing with rising coronavirus cases that could prompt further restrictions on households and businesses. Britain’s government borrowing in the first half of the financial year was more than six times higher than before the COVID pandemic, official figures showed on Wednesday, taking public debt to its highest since 1960. Annual inflation, meanwhile, rose 0.5% in September, up from 0.2% in August, driven by transport costs and higher restaurant prices after a government subsidy scheme ended. Those numbers and the “continued increase in COVID numbers and local lockdowns in the UK are still concerning,” said John Woolfitt, director of trading at Atlantic Capital Markets.

 

US Dollar

Reuters: The U.S. dollar treaded water against most major currencies on Thursday as U.S. stimulus talks remained the focus for markets with trading buffeted over recent days by the extent of progress made on the potential size of the aid package. The dollar index was nearly flat against a basket of currencies at 92.792, having marked its lowest level since Sept. 2 overnight. On Wednesday, the dollar weakened to a seven-week low after U.S. President Donald Trump and House Speaker Nancy Pelosi boosted hopes an agreement on stimulus was close, sparking demand for riskier assets. ”For a while, the pattern has been that when stimulus talks stalled, equities fell and the dollars were being bought due to risk-averse sentiment. But with optimistic headlines like these, the market is inclined to shift to risk-on mood and sell the dollars,” said Daisuke Karakama, chief market economist at Mizuho Bank. But prospects remain dim for the Republican-controlled Senate to approve any aid before the Nov. 3 election, as President Trump accused Democrats of being unwilling to craft an acceptable compromise on stimulus. Separately, Federal Reserve Governor Lael Brainard said the biggest risk to her outlook for economic recovery was that fiscal support from the federal government would be withdrawn too soon.


Analysts said the dollar was also pressured by a surge in currencies such as the sterling, which jumped to a six-week high overnight after Britain’s chief Brexit negotiator said talks with the European Union will resume on Thursday afternoon. In Asian trade, the pound’s uptick paused, down 0.15% at $1.3127. “We continue to believe it is in both EU and UK’s interests to strike a deal. Disruption to trade can affect Europe...and the resurgence of COVID-19 in Europe including within the UK could increase the need for a deal to avert further economic impact on both sides,” analysts at Maybank in Singapore wrote in a note. “Nonetheless, given the pace of the GBP rally recently, we are more cautious on whether further up-moves in the interim can gain traction without new positive developments,” they said. The euro edged 0.16% lower against the dollar to $1.8420, a fraction below a one-month high of $1.8805 hit on Wednesday. Traders are also awaiting the final debate between President Trump and Democratic rival Joe Biden later in the day, with the key feature this time around being a mute button to allow each candidate to speak uninterrupted. The Japanese yen drifted away from its four-week high of 104.345 marked overnight, last sitting at 104.74 against the greenback. “Dollar/yen trades are especially on wait-and-see ahead of the presidential debate,” said Sumino Kamei, senior analyst at MUFG Bank. The Australian dollar eased as E-mini futures for the S&P 500 lost more than 0.7% and as the currency remained vulnerable to further policy easing from the Reserve Bank of Australia. The Aussie was last fetching A$0.7090, while the kiwi pulled back slightly to 0.6645 but still held above the near two-week low it touched on Tuesday. Elsewhere, the Chinese yuan retreated, last changing hands at 6.6669 at midday, after hitting its strongest level since July 2018.

 

South African Rand

Reuters: South Africa's rand rallied to its firmest in more than a month on Wednesday as risk-taking globally was further boosted by hopes of a breakthrough in stimulus talks in the United States. At 1515 GMT the rand was 1.09% firmer at 16.3050 per dollar from an opening level of 16.4750. The unit touched a session-best of 16.2575, its best level since Sept. 17, bringing gains since last Wednesday to nearly 3%. "Movements are more a matter of dollar weakness rather than rand strength as markets look to the prospect of U.S. stimulus for short-term guidance. Around $2 trillion in COVID-19 relief funds now seem more a matter of 'when' rather than 'if'," said Shaun Murison, senior analyst at IG Markets. The White House and Democrats in the U.S. Congress edged closer to agreement on a new coronavirus-related relief package on Tuesday with President Donald Trump saying he was willing to accept a large aid bill despite opposition within his own Republican Party.


The main index of the Johannesburg Stock Exchange slipped sharply after opening but gained all the lost ground to close in the green as hopes of the U.S. economic aid package and higher commodity prices gave strength. The benchmark all-share index was marginally up by 0.13% to 55,345 points, while the blue chip top 40 companies index closed up 0.11% to 50,905 points. Banks and gold mining companies lent support to the indices with the bank index closing up 3.3% and the gold mining index 2.5% on a boost to gold prices. Diversified miner Sibanye Stillwater Ltd was the biggest gainer and ended the day up over 10%. Bonds were slightly weaker, with the yield on the benchmark 2030 government issue up 1 basis point to 9.295%.

 

Global Markets

Reuters: Asian shares fell on Thursday and U.S. Treasury yields ticked lower as investors fretted over the slow pace of U.S. stimulus talks and a surge in global cases of COVID-19. Global investor sentiment took a fresh hit over talks to boost the world’s largest economy after U.S. President Donald Trump on Wednesday accused Democrats of being unwilling to craft an acceptable compromise on stimulus, following reports of progress earlier in the day. It remains unclear whether stimulus negotiations would continue ahead of the U.S. presidential and congressional elections on Nov. 3. “We still think that this deal will remain elusive in the sense that this amount that we are talking about, $1.88 trillion, that’s about 9% of GDP, and 2.2 trillion which is Speaker Pelosi’s package, is even higher at around 10% of GDP,” said Anthony Chan, chief Asia investment strategist at Union Bancaire Privee (UBP) in Hong Kong. “Even if both sides do manage to reach an agreement, given the tight deadline ahead of the election it’s unlikely that something like that would be able to go through the Senate smoothly.”


In morning trade, MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.63%. Australian shares gave up 0.6%, Seoul's Kospi was off 0.59% and and Chinese blue-chips dropped 1.1%. The Nikkei was 0.69% lower. Uncertainty over the passage of a bill to stimulate a pandemic-ravaged economy comes as the United States faces a new wave of COVID-19 cases. Nearly two-thirds of U.S. states were in a danger zone of coronavirus spread and six, including election battleground Wisconsin, reported a record one-day increase in COVID-19 deaths on Wednesday. Against the backdrop of stimulus talks and the spread of the novel coronavirus, Wall Street’s three major averages closed lower on Wednesday after a choppy trading session. The Dow Jones Industrial Average inched lower by 0.35%, while the S&P 500 lost 0.22%. The tech-heavy Nasdaq Composite dropped 0.28%. On Thursday, the dollar was 0.11% higher against the yen at 104.67, while the euro notched down 0.19% to $1.1839. But against a basket of major peers, the dollar appeared relatively unaffected by setbacks to stimulus talks, trading only slightler higher at 92.784. “Markets are now pricing in a strong likelihood of a Biden Presidency perhaps even clean sweep of Congress, and this is weighing on the USD, as they view a less confrontational trade environment. They will also probably be factoring in a large fiscal stimulus early next year, with none of the hold up that is currently preventing a deal,” Rob Carnell, chief economist at ING in Singapore said in a note. The yield on benchmark U.S. 10-year Treasury notes ticked down to 0.8108% from a U.S. close of 0.816% on Wednesday. In commodity markets, oil prices dropped, adding to sharp losses overnight, after higher U.S. gasoline inventories pointed to a deteriorating outlook for fuel demand as coronavirus cases soar. U.S. West Texas Intermediate (WTI) crude futures fell 0.6% to $39.79 a barrel and Brent crude futures wer 0.48% lower at $41.358 a barrel.

HONG KONG OFFICE

 

US Dollar

Reuters: The dollar index against a basket of six major currencies slipped 0.3% to 93.261. The British pound traded at $1.3307, recovering slightly from a dip to a six-week low of $1.2839 on Wednesday. 

 

The dollar held steady against the safe-harbour Swiss franc at 0.9120 and was little changed at 106.20 yen. Traders in the dollar are closely watching global equities to see if a rebound in U.S. tech shares from a rapid sell-off will support riskier assets in other markets. 

 

Across the Tasman Sea, the New Zealand dollar was little changed at $0.6680.

 

Euro

Reuters: The euro held onto gains against the dollar on Thursday as traders braced for a European Central Bank meeting to gauge policymakers’ views on the common currency’s recent appreciation and its impact on inflation. Sterling steadied above a six-week low but could face more losses due to growing concern that Britain and the European Union will fail to agree a trade deal. 

 

While markets expect the ECB to keep policy steady, investors will closely watch President Christine Lagarde’s comments on how the euro’s rise to a two-year high this month affects the outlook for inflation and economic growth.  The euro bought $1.1807 in Asia on Thursday, holding onto a 0.3% gain from the previous session. 

 

Sentiment for cable has taken a hit after Britain unveiled draft legislation that analysts say raises the possibility of it exiting the EU single market in four months time with no trade agreement in place. The euro got a boost on Wednesday after Bloomberg News reported that ECB officials are growing more confident in the bloc’s economic outlook. However, traders may be reluctant to buy the common currency further before the ECB meeting due to earlier media reports that officials are growing uncomfortable with the euro’s almost 6% appreciation against the dollar from its June low.

 

Australian Dollar

FXStreet: AUD/USD takes offers around 0.7265, down 0.25% on a day, during the early Thursday. While weakness the latest Aussie data, as well as risk-reset, can be counted as fundamental catalysts behind the quote’s pullback, a short-term falling channel since September 04 plays its technical role. 

 

However, 100-HMA questions the pairs’ further downside around 0.7260 ahead of the 61.8% Fibonacci retracement level of August 25-30 upside, near 0.7250. Although the bears are likely to recede control around 0.7250, their further dominance will aim for the 0.7200 round-figures ahead of refreshing the monthly low while visiting the channel’s support near 0.7175.

 

Meanwhile, an upside clearance of the channel resistance of 0.7285 will have to cross the 200-HMA level of 0.7305 before allowing the bulls to retake controls. In doing so, 0.7340 and 0.7380 could gain market attention before the previous month’s top, also the multi-month peak, surrounding 0.7415.

 

Global Markets

Reuters: Asian markets are expected to swing higher on Thursday, after U.S. stocks reversed course from a three-day losing streak that led the technology-heavy Nasdaq into correction territory. The U-turn in U.S. stocks, however, was already reflected in some markets, so the impact in Asia may be muted, said Rodrigo Catril, a senior FX strategist at National Australia Bank. “We still expect markets to open with a positive turn, but we don’t expect a meaningful acceleration of it,” Catril said. “It should be a positive open but not a bombastic open.”

 

Australian S&P/ASX 200 futures rose 1.28% in early trading and Japan’s Nikkei 225 futures added 0.13%. Hong Kong’s Hang Seng index futures rose 0.85%. MSCI’s gauge of stocks across the globe gained 1.44%. Wall Street ended higher on Wednesday after investors ploughed into technology stocks, taking advantage of the recent dip. 

 

The Dow Jones Industrial Average rose 439.58 points, or 1.6%, to 27,940.47, the S&P 500 gained 67.12 points, or 2.01%, to 3,398.96 and the Nasdaq Composite added 293.87 points, or 2.71%, to 11,141.56. Oil prices recovered some of the losses they saw in the prior trading session when they hovered near three-month lows. U.S. crude rose 3.5% and Brent added 2.5%, although COVID-19 outbreaks still threaten to slow a global economic recovery. U.S. crude eased 0.5% in early Asian trade on Thursday to $37.88 a barrel.

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