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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.

 

20 / 08 / 18

LONDON OFFICE

 

British Pound

Reuters: The British pound inched higher on Friday as the dollar fell across the board, and some traders saw a buying opportunity after data this week pointed to the UK economy holding up relatively well. Worries about whether Britain can agree a trade deal with the European Union over coming months to avoid a sudden and disorderly exit from the bloc continue to keep most economists cautious about any sustained sterling strength. As trading in London ended the pound was on course for a sixth straight week of losses against the dollar, its worst run since 2014. It has also set its longest daily losing streak against the U.S. currency since the height of the financial crisis in 2008, hitting a near 14-month low of $1.2662 on Wednesday, but has since bounced three quarters of a cent to $1.2730. Retail sales data on Thursday showed the British economy, while far from booming, has some momentum.

 

British shoppers spent more than expected in July, pointing to a solid start to the third quarter for the economy, although data published earlier in the week showed a disappointing rise in wages that underlined the squeeze on consumers. “We are definitely seeing nervousness rising about a cliff-edge Brexit,” said Societe Generale FX strategist Alvin Tan, who flagged how sterling had also fallen back to 90 pence per euro this week. EURGBP= “Also we are seeing implied volatility in sterling rise in the last two weeks and these two are indications of a market with rising concerns,” Tan said. Against the euro the pound was ending the week at 89.58 pence. With most of the month’s UK economic data out of the way, the focus will shift back to Brexit as Britain heads towards several months of negotiations and several EU leaders summits. Jeremy Hunt, the British foreign minister, warned on Wednesday that the short-term market impact if Britain leaves the EU without a deal would be significant, though he later said Britain could “survive and prosper” after a no-deal departure.

 

US Dollar

Reuters: The dollar edged higher on Monday as confirmation was awaited that there will be talks this week between China and the United States, which markets hope will lead to an easing of their trade disputes. The dollar index .DXY against a basket of six major currencies ticked up 0.11 percent as of 0512 GMT to 96.211 after shedding more than half a percent on Friday. Escalating trade tensions between the United States and its trading partners, in addition to a plunge in the Turkish lira, has taken a heavy toll on emerging market currencies. These strains had pushed the dollar index .DXY to 96.984 on Aug. 15, its highest since June 2017.

 

On Monday, the dollar index traded in a narrow range between 96.103 and 96.219, not far off 96.096 touched on Friday, its lowest level since Aug. 10. The dollar’s advance halted ahead of anticipated trade talks between Chinese and U.S. officials in Washington. Media reports say the talks will take place in the next few days. Receding fears over the Turkish lira’s late plunge on Friday reduced risk aversion in the broader markets, lifting the euro. The U.S.-China negotiations “will not be between high level officials and are therefore unlikely to produce immediate results,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities. “However, the markets will be hoping that the talks pave the way for negotiations at a higher level,” he said.

 

South African Rand

BD Live: The rand briefly weakened through the symbolic R15 to the dollar level just before lunchtime on Friday, stretching its week-to-date declines to just more than 6%. This made it the worst-performing currency among emerging-market currencies over a five-day period. It was not immediately clear what caused the sudden slide in the rand, which weakened as much as 2% against the dollar and substantially against the euro and pound, before pulling back slightly. The Turkish lira also reversed course to trade just more than 4% weaker against the dollar, showing fluidity in financial markets. The sharp decline in the value of the rand echoed the data compiled by Institute of International Finance (IIF), showing that SA and China in particular felt the acute pain of the recent sell-off in emerging markets. SA accounted for $600m of the $1.3bn that investors have pulled from emerging markets since last Friday, according to the Washington-based IIF.

 

The weaker currency has the potential to cancel out the net positive effect of lower oil prices, meaning consumers are less likely to get a reprieve from high fuel prices, which have risen about 11% in 2018. While the recent negative global backdrop, which included concern about the Turkish economic crisis, hit the rand, local economic dynamics have influenced the value of the local currency. Earlier in the week, local retail sales undershot market expectations, fuelling concerns that SA’s economy could have slipped into a technical recession, defined as two successive quarters of economic contraction. If it plays out, the scenario will be a blow to the “new dawn” narrative championed by President Cyril Ramaphosa. Earlier in the year, markets had rallied in anticipation of better economic prospects under Ramaphosa. At the time, optimism was reflected in huge net equity inflows in particular, which helped to push many of the stocks to record highs on the JSE. But since then, optimism has given way to caution; net equity inflows have slowed to a trickle while foreigners have turned into net sellers of local bonds due to changes in global risk perceptions. According to JSE data, so far foreigners have bought just more than R8.5bn worth of local shares in 2018 while selling a net R32.4bn worth of local bonds over the same period. At 11.36am, the rand was at R14.9153 the dollar, after weakening to session lows of R15.0027/$

 

Japanese Yen

Reuters: The dollar was slightly weaker at 110.63 yen JPY= after shedding 0.35 percent on Friday. Kazushige Kaida, head of foreign exchange at State Street Bank in Tokyo, said dollar/yen could test the 110-level if there would unexpectedly be a negative outcome from the Sino-U.S. trade talks.

 

The last time the dollar weakened below that psychologically-significant handle on June 28, at 109.97 yen. “There will be more incentive to buy the dollar if risks recede, but I don’t think dollar/yen will easily break out of its range as a result of the trade negotiations,” Kaida said.

HONG KONG OFFICE

 

US Dollar

Reuters: The dollar sagged on Monday as investor demand for the safe-haven currency receded on optimism over a reduction in U.S.-China trade tensions, with the focus on discussions between the two countries due this week. The dollar index against a basket of six major currencies was little changed at 96.126 after losing 0.55 percent on Friday. Escalating trade tensions between the United States and its trading partners, in addition to a plunge in the Turkish lira, has taken a heavy toll on emerging market currencies. These strains pushed the dollar index to 96.984 last Wednesday, its highest since June 2017.

 

But the dollar’s advance halted ahead of lower-level trade talks between Chinese and U.S. officials in Washington scheduled for Tuesday and Wednesday. “The U.S.-China negotiations...will not be between high level officials and are therefore unlikely to produce immediate results. However, the markets will be hoping that the talks pave the way for negotiations at a higher level,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities. The offshore Chinese yuan was effectively flat at 6.838 per dollar after gaining about 0.4 percent on Friday, when it pulled further away from a 19-month low of 6.9585 brushed on Wednesday.

 

Japanese Yen

FXStreet: The Nikkie is negative at the start of the week and USD/JPY is opening in Tokyo for the week with a tendency for the downside, albeit following an improved risk sentiment on Wall Street, hindering any momentum in what is otherwise a subdued start to a potentially big week ahead.  USD/JPY dropped from the territory in the 111.40's midweek with the yen outperforming the G10s. This came on the back of a pause in the DXY's rally when US yields were falling on de-risking in EM-FX. at that point, the US 10yr was closing in on H&S neckline (2.81%) when they fell from 2.90% to 2.84% as investors looked for security in an exodus of global equities. 

 

Valeria Bednarik, chief analyst at FXStreet explained that in the daily chart, the pair has been pressuring a bullish 100 DMA the whole week while technical indicators are in bearish mode: "The Momentum retreating sharply from its mid-line, but the RSI ranging just above 40, lacking strength, all of which maintains the risk skewed to the downside. Shorter term, and according to the 4 hours chart, the pair is also biased lower, as it keeps developing below its 100 and 200 SMA, while the RSI aims lower around 42 and the Momentum heading higher in neutral levels. A steeper decline could be expected on a break below 110.10, now the immediate support."

 

Australian Dollar

FXStreet: AUD/USD bounced from 0.7252 to a high of 0.7318 and has left a bullish continuation closing daily stick on the charts. However, the Australian dollar remains vulnerable to TRY risk aversion. However, the August China/US trade talks news has so far taking the spotlight and despite RBA's Lowe saying that a further "moderate" AUD depreciation would be helpful. The August 14th  doji has so far served a bullish purpose and the price is supported by the prior descending resistance line and correcting higher. However, the fundamentals stack up with the broader technical outlook as the price accelerates down through the weekly channel. Only a sustained break above the 10-D SMA and then a close through 0.7360 could alleviate the near term bearish pressure.

 

Valeria Bednarik, chief analyst at FXStreet explained that in the daily chart, indicators have recovered from oversold readings, maintaining upward slopes but well below their midlines, as the price remains far below bearish moving averages: "Shorter term, and according to the 4 hours chart, the technical outlook is more encouraging, as technical indicators remain near overbought readings, as the price moved far above its 20 SMA, which slowly gains upward traction."

 

Global Markets

Reuters: Asian share markets crept cautiously higher on Monday as investors awaited developments on proposed Sino-U.S. trade talks, while keeping a wary eye on the Chinese yuan and Turkish lira for any new signs of strain. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.3 percent in early trade, with South Korea leading the way with a rise of 0.6 percent. Japan’s Nikkei wavered either side of flat, much as did the yen on the dollar. EMini futures for the S&P 500 edged up 0.08 percent.

 

In commodity markets, gold was flat at $1,184.19 an ounce having suffered its largest weekly loss since May 2017. It hit a 19-month low at $1,159.96 last week. The upward trend in the U.S. dollar has also pressured oil, with U.S. crude down for a seventh consecutive week and global benchmark Brent off for a third week. Early Monday, Brent was 12 cents lower at $71.71 a barrel, while U.S. crude eased 13 cents to $65.78.

 

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