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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.

 

18 / 09 / 19

 

LONDON OFFICE

 

British Pound

Reuters: The pound retreated further from last week’s gains following a heated remarks by Luxembourg Prime Minister Xavier Bettel on Monday showing that the gap between the British and European Union positions on Brexit remained far apart. Bettel lashed out right after talks with Boris Johnson, saying his British counterpart had failed to propose serious alternatives to unlock a Brexit deal before the Oct. 31 divorce date and seeking to blame the bloc for the “nightmare”. Bettel was standing alone at a podium that had been prepared for comments by both leaders, but Johnson left immediately after the meeting amid a loud anti-Brexit protest just outside Bettel’s office. The pound had fallen to a three-year low below $1.20 earlier this month, then soared by over 4% for a few days after lawmakers voted to stop Johnson taking Britain out of the EU at next month’s deadline even if a transition deal is not clinched. Johnson and his ministers been talking up progress in negotiations with Brussels, but the EU side has sounded less optimistic, putting the onus on Britain to come up with new, concrete ideas. 


The pound GBP has had a roller-coaster ride this year as the course of Brexit negotiations has been the single biggest factor for trading the currency, causing many large investors - as well as Bank of England Governor Mark Carney - to say the volatility is equivalent to that of an emerging market currency. “There is too much uncertainty on the pound. A headline can take out all the reason why you bought the currency in the first place on fundamental views,” said Chambers, who trades mainly G10 currencies, including the dollar, euro and Swiss franc. His cautious view on the pound was shared by many at the Tradetech conference in Barcelona, where some of the world’s biggest names in the $5.1 trillion foreign exchange market gather annually to talk about the major themes in the industry. Sunil Patil, a senior trader at Amsterdam-based APG Asset Management which invests 505 billion euros (£447.78 billion) for pension funds, said positions on the pound tend to be extremely short-term in nature. “We are seeing there is very little appetite in the market to carry long-term risk on the pound because of the Brexit uncertainty,” he said. Prime Minister Boris Johnson says Britain must leave the European Union on Oct. 31, whether he reaches an exit deal or not, but parliament passed a law last week over his objections ordering him to seek an extension if he fails to reach an agreement with the bloc. On Friday Johnson said there was the “rough shape of a deal to be done” over Brexit but Ireland’s Prime Minister Leo Varadkar played down the prospects, saying the gap between Britain and the EU remained “very wide”.

 

US Dollar

Reuters: The dollar rose against a basket of currencies on Monday as U.S. President Donald Trump’s authorization of the use of an emergency crude stockpile in response to drone attacks on Saudi Arabian refining facilities cooled a surge in oil prices. On Sunday, Trump said he had authorized the release of oil from the U.S. Strategic Petroleum Reserve (SPR) if needed in a quantity to be determined. He also said Washington was “locked and loaded” to retaliate for the attacks on the Saudi facilities. Another factor boosting the greenback was some exiting of bearish dollar bets in advance of the U.S. Federal Reserve’s two-day policy meeting. Traders widely expect the Fed will cut interest rates by a quarter of a percentage point this week. In July, Fed policymakers lowered short-term rates for the first time since 2008. “The market wants to short-cover in front of the Fed if the Fed doesn’t cooperate,” Schlossberg said. On the other hand, speculators trimmed their bullish bets on the dollar, according to the latest data from the Commodity Futures Trading Commission. At 11:31 a.m. (1531 GMT), an index that tracks the greenback against the euro, yen, sterling and three other currencies was up 0.38% at 98.63. It touched its lowest level since Aug. 27 on Friday. The dollar was -0.05% lower at 108.045 yen, recovering from an earlier low of 107.44 during Asian trading. The greenback fell to 98.655 Swiss francs before reversing to trade at 99.29, up 0.29% on the day. 


Drowned out in a glut of oil headlines overnight, the FOMC two-day meeting starts today in the United States. As well as a slowing global economy made worse by the U.S.-China trade war, the Federal Reserve rate-setting committee now has to contend with the possibility, of sharply escalating tensions in the Middle East and the ramifications of possible shots being fired across the Straits of Hormuz. The FOMC meeting will almost certainly concentrate on the bigger economic picture instead, and not get itself involved in the political chest-thumping sweeping the globe. The data from the United States is frankly, not that bad, but the Federal Reserve will not want to be caught wrong-footed and behind the curve, so to speak. Tomorrow’s rate decision will almost certainly be another 25 bps cut, but the critical factor will be whether it is another “mid-cycle adjustment,” or a move to an output easing bias. The former will undoubtedly incur the wrath of the U.S. president who thinks rates should be negative now. That said, he seems to be angry with everyone. The latter will almost certainly set off a wave of new easings by other central banks, as the United States had been the last man standing in the global slowdown. It will be particularly the case with emerging and developing markets, most of whom run some sort of USD peg or pseudo peg against their currencies. No export-driven country is going to want to lose market share in a contracting international market because their currency was too high against the dollar.It will be a blessing in disguise that China is in the midst of a trade conflict with the United States. The big boy of the developing market grouping has precious little room to move on the devaluation front because of it and will have to let those annoying free-market forces do the job more gently for it. To be fair to China, they have been a rock of stability in times of trouble such as the late 1990’s Asia crisis, when they would have been entirely within their rights to jump on the competitive devaluation bandwagon. The dollar bears waiting in the wings for the FOMC, may get their wish if the committee cuts and Mr Powell changes to an easing bias. That feeling of “I told you so” probably won’t last however as the rest of the world continues easing. As the dust settles, the realisation will be, that despite an easing bias, the United States will still have the highest interest rates in the G-10. Far away from the $15 trillion oil slick of negative-yielding sovereign debt floating on the ocean of the world’s capital markets. Dollar strength is likely to persist for the rest of 2019, even after the FOMC gives us the good oil on the future direction of U.S. interest rates.

 

South African Rand

BDL: A record jump in crude oil prices after attacks on Saudi Arabian oil fields pushed SA bonds to their biggest loss in five weeks on Monday amid concern that persistently elevated prices will fuel inflation and damage the country’s finances. The surge in crude and the resulting demand for safe havens such as dollar-denominated bonds briefly knocked the rand, which fell by the most in three weeks before ending Monday just a little weaker. The JSE could struggle to hold on to Monday’s gains on Tuesday, with Asian markets under pressure amid a spiking oil price and concern over rising tension in the Middle East. The US has told Saudi Arabia it believes Iran was responsible for an attack at the weekend in the kingdom, raising the prospect of a joint military response from the two countries. “Still, with trade war news winds blowing favourably and a torrent of central bank easing in the offing, barring an Iranian smoking gun in hand, investors don’t appear willing to throw in the equity market towel just yet,” said Vanguard Markets managing partner Stephen Innes in a note. Markets are still cheered by the prospect of US-China trade talks in October, while a number of global central banks this week could further boost sentiment. The US Federal Reserve is set to announce its latest policy decision on Wednesday; a 25 basis point cut is expected.


The rand, along with other emerging market assets, last week benefited from increased risk appetite after Washington and Beijing officials made concessions on retaliatory tariffs. The European Central Bank’s (ECB) decision to cut interest rates and its promise of more stimulus also lent support. However, the risk-on mood soured after an attack on Saudi Arabian refining facilities, leading investors to seek out safe-haven assets like the Japanese yen and Swiss franc. Oil prices surged nearly a fifth following the strikes, which knocked out more than 5% of global oil production. The currencies of major oil importers, such as the rand and Turkey’s lira, weakened. “South Africa is an oil importer and the surge in the oil price is negative for the country, particularly from an inflation point of view, if it is sustained,” said Investec chief economist Annabel Bishop. “The rand is likely to continue to remain volatile, with September a month that can see a lot of churn as market players return from summer vacations,” Bishop said.

 

Global Markets

Reuters: Oil futures shed some of their massive gains on Tuesday as the United States flagged the possible release of crude reserves, but the threat of military action over the attacks on Saudi oil facilities kept prices elevated and stocks under pressure. While equity market losses have not been large, the shaky investor confidence continues to support safe-haven assets, with gold edging higher on Tuesday and Treasury prices rising. Investors otherwise broadly remain on the sidelines ahead of an expected rate cut from the U.S. Federal Reserve on Wednesday. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.1%. Japanese stocks slid 0.48%, while Australian shares were down 0.18%. “There is certainly a risk-off tone, but I’m surprised the markets are not reacting more,” said Tsutomu Soma, general manager of fixed income business solutions at SBI Securities in Tokyo. “The U.S. and other countries have oil reserves, which helps sentiment in a case like this. You also have a lot of positions riding on the Fed meeting.” Brent crude, the international benchmark, fell 1.2% to $68.18 per barrel in Asia on Tuesday. On Monday Brent surged by 14.6% for its biggest one-day percentage gain since at least 1988. U.S. West Texas Intermediate futures were down 1.7% to $61.86 per barrel in Asia following a 14.7% surge on Monday, the biggest one-day gain since December 2008.


The drone attack over the weekend has cut the kingdom’s oil production in half, creating the biggest disruption to global oil supplies in absolute terms since the overthrow of the Iranian Shah in 1979, International Energy Agency data show. U.S. President Donald Trump has authorised the release of emergency crude stockpiles if needed, which could ease some upward pressure on crude futures, but risks to the outlook abound. Trump said on Monday it looked like Iran was behind the attacks but stressed that he did not want to go to war, which was a slightly less bellicose tone than his initial reaction. Iran has rejected U.S. charges that it was behind the attacks. Tension between the two countries were already running high over Iran’s ambitions for nuclear weapons. The strikes in Saudi Arabia are likely to raise regional tensions even further. In Asia on Tuesday, U.S. stock futures rose 0.05%, but sentiment remained fragile. On Wall Street, the S&P 500 ended 0.31% lower. Spot gold traded a shade higher in Asia at $1,498.60 an ounce following a 0.7% increase on Monday. The yield on benchmark 10-year Treasury notes fell slightly to 1.8327% The dollar was little changed at 108.17 yen. Some traders said it would be difficult to take big positions in the currency pair before the outcome of two important central bank meetings this week. The Federal Reserve is expected to cut interest rates at a policy meeting ending on Wednesday, which could put pressure on the Bank of Japan to ease policy at a meeting the following day. Traders are also focused on the U.S.-Sino trade war. Deputy-level talks between the United States and China are scheduled to start in Washington on Thursday, paving the way for high-level talks next month aimed at resolving a bitter trade row that has dragged on for more than a year. Any sign of progress to put an end to the trade war between the world’s two-largest economies could help improve risk sentiment, but negotiations have been fraught, making it difficult to judge whether the two sides can narrow their differences.

HONG KONG OFFICE

 

British Pound

FXStreet: GBP/USD nears crucial technical indicators while taking rounds to 1.2500 during Wednesday’s Asian session. A two-week-old rising trend-line offers immediate support. The GBP/USD pair is heading into Wednesday’s opening at levels last seen mid-July, around the 1.2500 level. 


In the daily chart, the pair is pressuring to surpass its 100 DMA for the first time since early May, indicating that bulls are still leading the pair. The GBP/USD pair surged to a fresh multi-week high of 1.2526, helped by receding dollar’s demand and comments from ECB’s Villeroy mid-US afternoon, saying that he still hopes that a Brexit deal can be reached, although adding that the EU must be ready for a no-deal. 


This Tuesday, the UK Supreme Court began a three-day heading over PM Johnson’s decision to prorogue the Parliament. The hearings will continue, and the decision will be unveiled Thursday. The UK will release this Wednesday, August inflation data. The yearly CPI is seen up by 0.5% from a previous 0.0%, although the core reading is seen at 1.8% vs. the previous 1.9%. The country will also release the Producer Price Index for the Same month.

 

US Dollar

Reuters: The dollar traded near a seven-week high versus the yen as oil markets recovered from a supply shock, but the focus is firmly on a U.S. Federal Reserve meeting later on Wednesday that is widely expected to deliver an interest rate cut. Major currencies are likely to trade in narrow ranges before the Fed’s meeting. Fed Reserve Chairman Jerome Powell has clearly broadcast his intention to cut rates, so some analysts warn that the dollar could actually bounce if the Fed eases policy as expected. 


The dollar traded at 108.10 yen on Wednesday, close to a seven-week high of 108.37 yen. The British pound was quoted at $1.2497, holding onto a 0.6% gain from Tuesday, when it briefly touched the highest since July 19. Oil prices tumbled around 6% on Tuesday after Saudi Arabia’s energy minister said the kingdom has tapped inventories to restore oil supplies to where they stood before drone attacks over the weekend shut around 5% of global oil output. 


The chaotic moves in money markets and late-day swings in U.S. federal funds futures mean the CME’s tool shows about a 51% chance that the Fed will cut rates by 25 basis points on Wednesday. Elsewhere in the currency market, the euro stood at $1.1072, flat so far in Asia. The Australian dollar fetched $0.68605, down 0.07% in early trade. The dollar index measuring the greenback against a basket of six major currencies fell 0.02% to 98.242. 

 

Japanese Yen

FXStreet: USD/JPY is steady in Tokyo on Wednesday, having been in a chop overnight in the low 108s before scoring a fresh high in the 108.37 earlier. USD/JPY's resistance up in the 109.30's are in focus, as attention turns towards the key FOMC event. 


USD/JPY's resistance up in the 109.30's are in focus. "Short-term the cross is likely to consolidate a little around the 50% retracement at 108.43," analysts at Commerzbank explained. Valeria Bednarik, the Chief analyst at FXStreet explained that the pair could find some directional momentum with the Fed, with the bullish case set to remain in place as long as it holds above 107.45. The natural bullish target is August high at 109.31, although the Fed´s decision is in the way, and could well be a game-changer for the dollar. 


US industrial production climbed 0.6% in August against the 0.2% median expectation which was the largest monthly gain since August 2018. In other related news, an ‘initial’ trade agreement between the US and Japan has been agreed. 

 

Global Markets

Reuters: Oil prices cooled on Wednesday as Saudi Arabia said the kingdom had fully restored its oil supply following attacks on its crude facilities although caution ahead of an expected U.S. interest rate cut kept wider financial markets in tight ranges.  


MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.05% while Japan’s Nikkei slid 0.03%. Wall Street shares ticked up a tad on Tuesday with the S&P 500 gaining 0.26%. Brent crude futures fell 0.64% to $64.14 a barrel while U.S. West Texas Intermediate (WTI) crude lost 0.78% to $58.88 per barrel. Saudi Energy Minister Prince Abdulaziz bin Salman said the kingdom has recovered supplies by tapping inventories, and lost oil output of 5.7 million barrels per day (bpd) by the end of September.


Saudi Arabia’s oil output will be fully restored faster than thought following weekend attacks on production facilities, two sources briefed on developments also said on Tuesday, taking two or three weeks, not months as initially expected.  “I would think a spike in oil prices will likely prove to be short-term given that the global economy isn’t doing too well,” said Akira Takei, bond fund manager at Asset Management One. Still, heightened geopolitical tensions underpinned oil as well as some safe-haven assets such as U.S. bonds. 

 

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