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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.

 

29 / 05 / 20

 

LONDON OFFICE

 

British Pound

Reuters: The pound rose around half a percent against a weaker dollar on Thursday, but was little changed against the euro, as Brexit-related risks and speculation about negative interest rates continue to limit the pound’s gains. The safe-haven dollar fell to a near two-month low as global risk appetite was boosted by investors’ optimism about economies re-opening. A 750-billion-euro stimulus plan in Europe lifted regional stock indices and the euro. The pound gained as much as 0.6% against the dollar, reaching $1.2335 at 1455 GMT. It was last at $1.2314, up around 0.4%. Versus the euro, the pound was broadly flat, at 89.75 pence. Before coronavirus, the last time cable was this low was in early October, when markets feared a no-deal Brexit was imminent. The market has turned increasingly short on sterling for the last 11 weeks straight, according to weekly futures data. “Sterling’s only support is the size of the short positions, and thin month-end markets magnify that support, but that doesn’t change the fundamentals,” Societe Generale strategist Kit Juckes wrote in a note to clients. 


The pound is being held down by several factors: a lack of progress in EU trade talks, speculation about negative interest rates in Britain, a deep recession and a growing pile of debt. Sterling fell 1% on Wednesday after Britain told the European Union on Wednesday it needed to break a fundamental impasse to clinch a Brexit trade deal by the end of the year. Britain has the worst COVID-19 death toll in Europe. A COVID-19 test and trace service began in England on Thursday to allow the loosening of lockdown measures for most of the population. But nearly half of businesses in Britain that have temporarily suspended their operations because of the coronavirus lockdown are unsure when they will re-open. Britain’s economy is unlikely to recover fully from the “searing experience” of the coronavirus in the next two to three years, the Bank of England’s Michael Saunders warned on Thursday, in the gloomiest medium-term assessment to date from a UK policymaker. Saunders also said he would not necessarily rule out negative rates, and that too much stimulus was better than too little. “The question whether the BoE key rate is slightly above or below zero does not really matter,” Ulrich Leuchtmann, head of FX and commodity research at Commerzbank wrote in a note to clients. “Monetary policy in the UK - just like almost everywhere else in the world - has pretty much reached the end of the line.”

 

US Dollar

Reuters: The dollar was hemmed into a narrow trading range on Friday as traders’ focus shifted to U.S. President Donald Trump’s response to China’s passage of a national security law for Hong Kong. The yuan fell in onshore trade and remained near a record low in offshore trade as markets turned nervous before Trump’s announcement later on Friday of policy moves that could ignite a diplomatic row between Washington and Beijing. The greenback was on course for a weekly loss against major currencies as progress in lifting coronavirus lockdowns and stimulus plans in Europe weakened demand for safe havens, but the mood could quickly worsen if Sino-U.S. tensions increase. “At the moment, hopes for economic recovery are strong, but I expect this to gradually fade to increased concern about the U.S.-China relationship,” said Minori Uchida, head of global market research at MUFG Bank in Tokyo. “When that happens, there will be more risk-off trades, which supports buying of both the dollar and the yen.”


The dollar stood at $1.1083 per euro in Asia on Friday, close to its lowest since March 30. The common currency was headed for its second weekly gain against the greenback as the EU’s announcement of a 750-billion-euro coronavirus recovery fund fuelled optimism about the euro-zone economy. The dollar last bought 0.9632 Swiss francs, on course for a 0.8% weekly decline. The greenback was little changed at 107.43 yen. The Australian dollar bought $0.6630, close to its highest in more than two months, while the New Zealand dollar traded at $0.6204, near its strongest since March 11. The Aussie and the kiwi were on course for weekly gains as investors cheered the gradual re-opening of business activity in the two antipodean economies. Japan’s currency crept higher against the euro, the Aussie and the kiwi, supported by safe-haven flows in relatively subdued trade. China’s parliament on Thursday approved national security legislation for Hong Kong that Western countries fear could erode the city’s freedoms. Trump, who has vowed a tough U.S. response, told reporters he would hold a news conference on China on Friday. The risk is Hong Kong could lose some of the special privileges in enjoys under U.S. law, which would threaten its status as a global financial hub.

 

South African Rand

Reuters: South African stocks firmed on Thursday with risk-on sentiment remaining intact on optimism that global growth is recovering as economies reopen after coronavirus lockdowns. The Johannesburg All-Share index rose 1.77% to 51,389 points, while the Top-40 index climbed 1.80% to 47,440 points, led by Northam Platinum and Impala Platinum with prices of the metal nearly 1% by 1525 GMT. Northam climbed almost 13% to a 2-1/2-month high, while miner Impala was up almost 11%. “Global...stocks continued to trend higher as investors became more optimistic about the pace of the economic recovery from the Covid-19 pandemic and gave little attention to the ongoing U.S.-China confrontation over Hong Kong,” Hussein Sayed, Chief Market Strategist at FXTM, said in a note.


South African President Cyril Ramaphosa on Sunday announced a further easing of the country’s lockdown from June 1, allowing the vast majority of the economy to return to full capacity. The government published guidelines on Thursday for how sectors will operate under much relaxed restrictions. The rand gave up earlier gains having touched its strongest level since March 27. It traded at 17.4390 per dollar at 1542 GMT, down 0.43 from its previous close of 17.3760. In fixed income, the yield on the 2030 government bond was down 5 basis points at 8.935%.

 

Global Markets

Reuters: Stock markets dipped and safe-havens such as bonds and Japan’s yen firmed on Friday, as investors awaited Washington’s response to China tightening control over the city of Hong Kong. China’s parliament on Thursday pressed ahead with national security legislation for the city, raising fears over the future of its freedoms and function as a finance hub. U.S. President Donald Trump, who has vowed a tough response, said he will hold a news conference on China later on Friday. Trepidation about a further deterioration in Sino-U.S. relations sent stocks lower and put investors on edge. European futures were in the red, with FTSE futures down 0.7% and EuroSTOXX 50 futures 1% lower. Futures for the S&P 500 slipped 0.2%. MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.1%. The Nikkei retreated slightly from a three-month high and, though moves were small, the safe-haven yen rose to a two-week high and bonds rose.


“It is seen as a major threat to the rally we’ve had and the recovery,” said Shane Oliver, chief economist at Australian wealth manager AMP Capital. The possible U.S. response could range from a tearing up of the Phase 1 trade deal and fresh tariffs on China, to milder travel or financial sanctions on Chinese officials, he said. “If it’s at the relatively mild end, then I don’t think it would derail the recovery bull market, but if it’s at the more extreme end with tariffs and harsh treatment of Hong Kong, then I think it gets more problematic,” Oliver said. Trump offered a muted response to Hong Kong’s mass democracy protests last year while prioritising a trade deal with Chinese President Xi Jinping. But ties with Beijing have since soured considerably through the COVID-19 pandemic. Hong Kong’s government warned on Friday that withdrawing its special U.S. status, which has underpinned it as a finance hub, could be a “double-edged sword” and urged the United States to stop interfering in internal affairs. In bond markets, yields on benchmark 10-year U.S. Treasuries fell 3 basis points to 0.6705%, more than 100 basis points below where they began 2020. Gold was firm at $1,720.87 an ounce. Demand jitters kept oil under pressure and Brent crude slipped 33 cents or 0.9% to $34.96 a barrel, while U.S. crude was down 1.6% at $33.17 a barrel. 

HONG KONG OFFICE

 

US Dollar

Reuters: The dollar was hemmed into a narrow trading range on Friday as traders’ focus shifted to U.S. President Donald Trump’s response to China’s passage of a national security law for Hong Kong. The yuan pulled away from a record low in offshore trade, but investors remain nervous ahead of Trump’s announcement later on Friday of policy moves that could ignite a diplomatic row between Washington and Beijing. The greenback was on course for a weekly loss against major currencies as progress in lifting coronavirus lockdowns and stimulus plans in Europe weakened demand for safe havens, but the mood could quickly worsen if Sino-U.S. tensions increase. The dollar stood at $1.1073 per euro in Asia on Friday, close to its lowest since March 30. 

 

The common currency was headed for its second weekly gain against the greenback as the EU’s announcement of a 750-billion-euro coronavirus recovery fund fuelled optimism about the euro-zone economy. The dollar last bought 0.9644 Swiss francs, on course for a 0.7% weekly decline. The greenback was little changed at 107.67 yen. The Australian dollar bought $0.6630, close to its highest in more than two months, while the New Zealand dollar traded at $0.6204, near its strongest since March 11. The Aussie and the kiwi were on course for weekly gains as investors cheered the gradual re-opening of business activity in the two antipodean economies. China’s parliament on Thursday approved national security legislation for Hong Kong that Western countries fear could erode the city’s freedoms. Trump, who has vowed a tough U.S. response, told reporters he would hold a news conference on China on Friday. The risk is Hong Kong could lose some of the special privileges in enjoys under U.S. law, which would threaten its status as a global financial hub.

 

The potential stand-off has stirred memories of last year’s bruising Sino-U.S. trade war, which weighed on the global economy and roiled financial markets. Offshore, the yuan traded at 7.1725 per dollar. Investors will closely watch the opening of the onshore yuan and moves in Chinese stocks to gauge market sentiment before Trump’s announcement. This week the euro led the charge against a weakened dollar after EU policymakers unveiled fiscal stimulus combining grants and loans intended to ease dissent among euro-zone countries. Analysts say the euro may struggle to extend its gains, because fiscally conservative member states may still push to alter the plan. Some traders will focus on the release of German retail sales and EU consumer prices later on Friday to measure the health of the euro-zone economy. Elsewhere, the pound held steady at $1.2317. However, sentiment for the pound has been somewhat negative due to calls for the resignation of an influential aide to British Prime Minister Boris Johnson, lack of progress in EU trade talks, and speculation about negative interest rates. 

 

Chinese Yuan

FXStreet: USD/CNH has been sent back to a low of 7.1659 on Friday, travelling from a monthly high printed yesterday and a touch below there today at 7.1770 as EUR/USD squeezes out the week shorts. There is a focus on DXY weakness and the euro's strength for which leads some to believe USD/CNH is destined lower. European equities closed higher on Thursday and the EUR/USD rose from 1.1000 to 1.1092 – a two-month high. The EC economic sentiment gauge also improved slightly in May to 67.5 (prev: 64.9) as lockdown restrictions are gradually eased. The improvement in industry confidence, which was led by improved production expectations, is supporting risk-on sentiment. This, in turn, is turning the screw in the US dollar's cage, enabling all boats to rise. However, with manufacturers remaining pessimistic about demand and sentiment in the services sector deteriorating further, as well as signs that COVID-19 is lurking around European street corners, upside potential for the euro is limited, fundamentally. 

 

Meanwhile, bearish factors for the US dollar are creeping in from the US economy which US stocks continue to defy gravity (safe haven USD bearish). US weekly jobless claims rose in line with expectations at 2.1 million. "However, continuing claims fell to 21m from 25m (estimates were close to 26m), indicating the worst in the labour market may have passed," analysts at Westpac explained. In other data, the analysts noted that April durable goods orders did not fall as much as expected, the headline measure down 17.2%m/m (vs est. -19.0%m/m), and the ex-transport measure down 7.4%m/m (vs est. -15%m/m). "The second take on Q1 GDP was slightly weaker (annualised -5.0%, vs est. -4.8%), although personal consumption fell 6.8% annualised (vs the expected -7.5%). Pending home sales fell 21.8%m/m in April (vs est. -17%m/m)." Besides economic data and central banks, geopolitics is coming back to the fore, fast and has the gleaming potential to send USD/CNH higher. In the final hour of trade on Wall Street, the US President Donald Trump announced that he will hold a news conference on China today. This conference is more than likely to include the president's opinions on a number of major risk-off themes, but most critically, the US administration's political response to China’s parliament approving a decision to go forward with national security legislation for Hong Kong.

 

This was a move that has triggered widespread concern about democratic freedoms and is highly controversial. The US administration has already announced that it has cancelled visas for Chinese students with ties to military schools and has stripped Hong Kong of its special treaty status, certifying it as no longer autonomous. This opens the way for the Trump Administration to revoke special arrangements on trade. Market implications are significant. We have already seen the value of the CNY weaken vs. the USD which will likely raise concerns that China could be weaponising its currency to support external trade. In such an environment, the USD could well disappoint those positioning their bets for a significantly weaker US dollar. Throughout the trade wars in 2018, the DXY and USD/CNH both climbed almost 11% and the euro fell by the same margin.  

 

Australian Dollar

FXStreet: While extending its pullback moves from the intraday low, AUD/USD rises to 0.6638 during Friday’s Asian session. Even so, the Aussie pair manages to flash only 0.03% gains on a day. Although the recent news surrounding the People’s Bank of China’s (PBOC) liquidity infusion seems to have helped the Aussie pair, Beijing’s anti-dumping investigation into Australian and Japanese chemical exports cap the upside. Earlier during the day, AUD/USD struggled to extend the previous day’s run-up amid fears of an escalation in the US-China tussle as well as downbeat statistics from Australia.

 

Following US President Donald Trump’s calling of China conference, the market’s risk-tone turned darker as the Republican leader has already signaled sanctions for the Asian major during the early week. On the data front, Australia’s Private Sector Credit marked April monthly figures at 0.0% while repeating a 3.6% yearly data-point. Having that as a background, it becomes easy to understand the recent weakness in the risk catalysts like the US 10-year Treasury yields and stocks in Australia and Japan. 

 

Considering the lack of major economics from Australia left for publishing, investors might await the US Chicago Fed Purchasing Managers’ Index and Michigan Consumer Sentiment Index for immediate direction. Analysts at Westpac seem cautious ahead of the US data as they said, “In the US, the main market focus will be Trump’s press conference on China. On the data front, April wholesale inventories will continue to wind down as businesses brace for the demand shock. Personal income (market f/c -6.0%) and personal spending (market f/c -12.8%) will be hit hard in April, with further weakness ahead as job losses dampen activity. Having slipped into negative territory in March, the core PCE deflator is set for another weak print of -0.3%. To round out the day, the May Chicago PMI is poised for a marginal recovery (market f/c 40.0), and Fed Chair Powell will take part in a moderated virtual discussion (01:00 AEST).” Bulls keep waiting for the clear break above the 200-day SMA level of 0.6660 will provide another push towards 0.6700 round-figure. Until then, the bearish divergence on RSI will keep pushing sellers towards a nine-day-old support line at 0.6580 and 100-day SMA around 0.6485.

 

Global Markets

Reuters: Asian shares were set to dip in choppy trade on Friday as worries about worsening U.S.-China ties offset the fillip from hopes massive government stimulus can jump-start the world economy. E-Mini futures for the S&P 500 edged down 0.12% in early Asian trade, while Nikkei futures pointed to a loss of 10 points. Weaker Australian stock futures also indicated a softer open. Underscoring the ambivalence in markets, U.S. stocks slid from a near three-month high in a late sell-off overnight, after U.S. President Donald Trump signed an executive order that would weaken laws protecting social media companies, and said he’d hold a news conference about China on Friday. In the latest dispute between the world’s two biggest economies, the U.S. government has signaled plans to punish Beijing for proceeding with a national security law for Hong Kong that critics fear would erode the city’s freedoms. 

 

All eyes are now on Friday’s press conference hosted by Trump where he will address his response to China over its treatment of Hong Kong. It is not clear if Trump will rescind some, none, or all of the U.S. economic privileges that Hong Kong enjoys under U.S. law. Larry Kudlow, Trump’s top economic adviser, said on Thursday Hong Kong may now need to be treated like China on trade and other financial matters, which could have implications for tariffs and stock market listings. If tensions between China and the United States intensify, a build-up of short positions in the S&P 500 index, or bets that the index will fall, could spark a sell-off in shares. Stock markets have rebounded from lows hit in mid-March on hopes that enormous government stimulus could help the world economy recover more quickly than expected from the coronavirus shutdown. Some analysts have warned, however, that such optimism is misplaced given the extent of economic devastation.

 

Indeed, the latest U.S. data showed the economy may be stabilising, but at a much lower level. Figures released overnight showed the number of Americans seeking jobless benefits fell for an eighth straight week last week, but claims remained astonishingly high. In a sign investors are undecided about how much risk to take on, prices for safe-haven gold rose, even as the U.S. dollar and Japanese yen — in demand when investors shy from risk — softened. Spot gold was slightly firmer at $1,718.87 per ounce from $1,712.35 seen overnight. The dollar index slipped 0.4% to 98.51, held back in part by a stronger euro , as the common currency continued to bask in the glow of a 750-billion-euro coronavirus recovery fund for the European Union. The euro was firm at $1.1073 against the dollar, near a two-month high of $1.1087, while the yen edged down 0.07% to 107.07 on the dollar. U.S. Treasury yields were steady after inching higher overnight as gains in stocks softened demand for bonds. Benchmark 10-year yields held at 0.7050%. Oil prices gave up some of their gains overnight, as concerns that Trump could impose sanctions on China over Hong Kong and a surprise build in inventories overshadowed a steady improvement in U.S. refining activity. In early Friday trade, U.S. West Texas Intermediate crude had slipped 0.18% to $33.65. 

 

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