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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.

 

12 / 12 / 19

 

LONDON OFFICE

 

British Pound

Reuters: The pound inched higher on Wednesday in very thin trading, shrugging off an opinion poll for Britain’s election that showed the ruling Conservative Party might fail to win a majority. The narrowing of the Conservative’s lead just a day before the vote has cast some doubt on the expectations of a definitive outcome that have boosted sterling in recent weeks. The British currency was last up 0.2% at $1.3180, not far from the eight-month high above $1.32 it hit on Tuesday. Against the euro, it rose by the same amount to 84.15 pence but remained below Monday’s 2-1/2 year high of 83.94. A closely watched model from pollsters YouGov put Prime Minister Boris Johnson on course to win a majority of 28 in parliament on Thursday, down from a forecast of 68 last month. YouGov also said its model could not rule out a hung parliament, where no party gains a majority.


A poll by research company Opinium on Wednesday said the Conservatives’ lead over Labour had narrowed to 12 points - a marginally better forecast than YouGov’s. The pound has rallied in recent months on growing expectations the Conservatives would gain an outright majority, helping them pass a withdrawal deal with the European Union that was agreed in October - and ending 3-1/2-years of uncertainty. “Less Brexit uncertainty in itself can deliver a wide enough gap between growth expectations in the UK and its major partners such that sterling is not going to be a favourite short,” said Geoffrey Yu, head of the UK investment office at UBS Wealth Management. Leveraged funds held $2.44 billion in net short positions on the pound in the week to Dec. 3, CFTC data showed, and analysts said there is still room for those positions betting on a fall in sterling to be unwound, which could drive the pound higher. In betting odds data released following the YouGov poll, the chance of a Conservative majority fell to 69% from 80% two days earlier, according to betting platform Betfair. Betfair said this compared to an 83% chance of a Conservative majority the day before the election in 2017, when no party won a majority in a surprise result. The probability of a hung parliament is also higher this time round - 29% rather than 14% right before the 2017 election - demonstrating the difficulty of predicting the result. With the market betting on some sort of Conservative majority, a hung parliament could hit sterling hard, pushing it down to $1.26, according to ING analysts. Gains in the event of a Conservative majority are expected to be less pronounced, since this outcome has largely been priced in, according to ING analysts. They expect the pound to rise to $1.35 if there’s a large Conservative majority and $1.33 if they have only a slender majority. A majority for the main opposition Labour Party - considered unfavourable to markets - could push sterling down to $1.24, ING analysts said.

 

US Dollar

Reuters: The dollar nursed its steepest losses in weeks on Thursday, after the U.S. Federal Reserve’s benign inflation outlook hosed down expectations for a rate hike any time soon, pushing Treasury yields lower. Investors also remained on edge as Sunday’s deadline for the next round of U.S. tariffs on Chinese goods looms, and ahead of a European Central Bank (ECB) meeting and the UK election later on Thursday. The greenback hit its lowest in more than a month against the euro after the Fed meeting, and sat just above that level at $1.1133 in early Asian trade. Against a basket of currencies the dollar recovered somewhat from an overnight four-month low, but remained subdued at 97.413. The yen crept higher to 108.47 per dollar. The biggest winners were the Australian and New Zealand dollars, which soared as shorts scrambled to exit their positions. Traders said some had bet on a more hawkish Fed outlook.


“The Fed was not as optimistic as people thought, and that is consistent with a lower U.S. dollar and the fall in bond yields that we saw,” said Commonwealth Bank of Australia analyst Joe Capurso. Fed Chairman Jerome Powell said the economic outlook for the U.S. was favorable as the central bank announced its decision to hold rates steady, as expected, though forecast only moderate and slowing growth through 2020 and 2021. New economic projections showed 13 of 17 Fed policymakers foresee no change in interest rates until at least 2021. The kiwi dollar hit its highest since July after that, and was steady at $0.6581 on Thursday. The Aussie added 1% to hit a one-month high, and gave back only a fraction of that in early trade to hover around $0.6868. Bond yields also slid after the decision. Investor focus now shifts to the looming trade deadline, Christine Lagarde’s first meeting at the helm of the ECB, and voting in the British election. U.S. President Donald Trump is expected to meet with top advisers on Thursday about the tariff deadline, three people familiar with his plans told Reuters. A fourth person familiar with the administration’s thinking said they expected the tariffs to be enforced. Lagarde is all but certain to keep money taps wide open, but investors will be curious to tune in to her first post-meeting press conference to seek clues about a broader policy revamp that could become the cornerstone of her tenure. That is due to begin at 1330 GMT. Before then, at 0700 GMT, voting begins in the United Kingdom, where polls have tightened recently but still predict a Conservative victory. The pound is priced for a Conservative majority that could control parliament and lead Britain out of the European Union at the end of January, and anything short of that could prompt a slide. The dollar's weakness helped Sterling drift higher to $1.3210 on Thursday. Voting ends at 2200 GMT, with exit polls and early results likely to flow after that and traders expecting an outcome as early as 0300 GMT on Friday. “Prices should jump around...with likely sharp reactions as each constituency release their results,” said Chris Weston, head of research at Melbourne brokerage Pepperstone. “We are watching GBP/USD overnight implied volatility as it rolls over, and there is no doubt it will be sky-high, with traders pricing some punchy moves in the pound. One for the bravest of souls.”

 

South African Rand

BDL: The JSE ended in positive territory on Wednesday as global markets rose ahead of the outcome of the US Federal Reserve’s policy meeting, with the Fed expected to keep interest rates unchanged at its last meeting for 2019. The latest US economic data supports no change in interest rates, with analysts concurring. Inflation in the world’s largest economy came in higher than expected in November, while employment figures released last week were better than expected. The Fed is unlikely to cut interest rates again in the near term, following three cuts earlier this year. Locally, the latest inflation and retail sales data were released earlier on Wednesday with the former coming in better than expected, while the latter disappointed. Consumer inflation slowed to its lowest levels since December 2010, Statistics SA said earlier. Annual growth in consumer prices, as measured by the change in the consumer price index (CPI), slowed to 3.6% in November, down from 3.7% in October.


“Since the end of 2016, inflation has been on a downward trend, and has remained firmly within the SA Reserve Bank’s 3%-6% monetary policy range since April 2017,” the agency said. Retail sales growth slowed marginally in October on revised figures, reaching the lowest level in seven months, Stats SA said. Annual growth in retail sales slowed from a revised 0.4% in September to 0.3% in October, below expectations. A Bloomberg poll of nine economists had forecast growth of 0.6%. On a month-on-month, seasonally adjusted basis, retail sales contracted 0.2%. At 7.24pm, the rand had strengthened 0.59% to R14.6999/$, after weakening 0.81% on Tuesday after Eskom laid bare the dire situation of power generation in the country. It gained 0.69% to R16.2933/€ and 0.57% to R19.3614/£. The euro was flat against the dollar at $1.1093. Shortly after the JSE closed, the Dow had fallen 0.18% to 27,830.33 points. In Europe, the FTSE 100 was up 0.03%, Germany’s DAX 30 0.58% and France’s CAC 40 0.22%. Gold was up 0.43% to $1,470.88/oz and platinum 2.08% to $936.51. Brent crude dropped 0.81% to $63.66 a barrel. The JSE all share gained 0.63% to 55,766.5 points with the top 40 rising by the same margin. Banks recovered 1.06% and financials 0.33%. Miners continued their march upwards, with resources adding 1.12%, the gold index 3.36% and platinums 3.89%.

 

Global Markets

Reuters: Asian stocks rose on Thursday to the highest in a month after the Federal Reserve signalled rate settings were likely to remain accommodative, but the imminent UK election and a deadline for Sino-U.S. trade talks kept investors cautious. The Fed kept interest rates unchanged, as expected, at its policy meeting on Wednesday but indicated interest rates would remain on hold, which nudged Wall Street stocks higher. That helped MSCI's broadest index of Asia-Pacific shares outside Japan climb 0.8% to the highest since Nov. 11. Japan's Nikkei stock index rose 0.18% and U.S. stock futures edged up 0.1%. Australian shares were down 0.7%, however, weighed by the financial sector after a money-laundering scandal. “The Fed’s accommodative stance does support equities, but the chance of a disruptive election outcome in Britain is very real,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney. “You also have the U.S.-China trade problem. We’re likely to see subdued trading and some investors may lock in profits as the day progresses.”


The S&P 500 rose 0.29% on Wednesday after the Fed's rate decision, which included enough dovish tones to cheer markets. Traders are bracing for a series of make-or-break events over the next few days that have the potential to cause huge swings in financial markets for months to come. Sterling traded near the highest in more than two years versus the euro and close to an eight-month high versus the dollar before voting begins in an election that will determine whether Britain exits the European Union in an orderly fashion. Polls show the Conservatives’ lead shrinking ahead of an election starting later on Thursday, which could jeopardise chances of a smooth Brexit. Exit polls for Britain’s election will begin around 2200 GMT after voting closes, then official results will begin to trickle in. UK Prime Minister Boris Johnson’s ruling Conservative Party is running on a pledge to enact a swift split from the EU, ending more than three years of uncertainty. Traders say a hung parliament or a victory for the main opposition Labour Party could cause huge disruptions because Labour is promising another referendum on membership of the bloc. Against the euro, sterling rose 0.1% to 84.26 pence, close to its firmest level since May 2017. The pound rose 0.2% to $1.3225, just shy of its highest since March. The euro traded at $1.11405, close to a five-week high before a European Central Bank meeting later on Thursday where policymakers are expected to keep rates on hold. Chinese shares slipped 0.06%. Activity was subdued as investors awaited more news about the Sino-U.S. trade war. U.S. President Donald Trump is expected to meet Thursday with top advisers to discuss tariffs on nearly $160 billion of Chinese consumer goods that are scheduled to take effect on Dec. 15, three sources told Reuters. Trump is expected to go ahead with the tariffs, a separate source told Reuters, which could scuttle efforts to end a 17-month long trade dispute between the world’s two-largest economies. The dollar index against a basket of six major currencies fell 0.35% to 97.076, approaching a four-month low reached on Wednesday after Powell it would take a significant pick-up in inflation to cause the Fed to raise rates. Treasury yields initially fell in reaction to Powell’s comments, but they rebounded slightly in Asia. The yield on benchmark 10-year Treasury notes rose to 1.8017%. U.S. crude edged up 0.24% to $58.90 a barrel. Brent crude rose 0.46% to $64.01 per barrel. A report by OPEC released on Wednesday suggested that oil markets are tighter than previously thought. Traders are also focused on state oil company Saudi Aramco, whose shares surged the maximum permitted 10% above their IPO price on their Riyadh stock market debut on Wednesday, making it the world’s most valuable listed company.

HONG KONG OFFICE

 

British Pound

FXStreet: GBP/USD looks for firm direction around the multi-month top. Recent polls show a mixed picture but Tories stay on the front, fears of hung parliament prevails. The election results will be the key to the future of Brexit and Conservatives’ leadership. Following a Fed-led rally, GBP/USD bulls catch a breather around 1.3210 amid Thursday’s initial trading session. Traders now seem cautious as the United Kingdom’s (UK) general elections will begin soon. While all of the recently released polls keep the ruling Conservative Party at the top, their receding lead over the opposition Labour Party becomes the reason to worry for the markets.

 

The benchmark YouGov MRP model took a step back from the previously upbeat analysis while poll results from Savanta/ComRes show worrisome signs with only five points’ lead of Tories over the Labours. Adding to the market’s concern is the recent criticism of the Prime Minister (PM) Boris Johnson over various issues ranging from the National Healthcare System (NHS) to the Northern Ireland border. Portraying the risk sentiment, the US 10-year treasury yields keep it close to the weekly low, around 1.79%.

 

The pair previously benefited from the US Federal Reserve (Fed) Chairman’s cautious statement signaling the absence of anticipated rate hikes in 2020. Moving on, voting for the election will begin at 07:00 GMT and the polls will be closed by 22:00 GMT. Exit polls after 22:00 could trigger major moves due to the importance of the results. The key to watch here is the Tory majority in the parliament. If the Conservatives fail to grab more than 340 seats, doubts over their efforts on Brexit can weigh on the British pound (GBP). A sustained break of 1.3220 can push the pair’s run-up to 1.3270 and 1.3300 whereas yearly top close to 1.3380 will be in focus afterward. On the downside, 10-day Simple Moving Average (SMA) near 1.3100 acts as near-term key support.

 

US Dollar

Reuters: The dollar nursed its steepest losses in weeks on Thursday, after the U.S. Federal Reserve’s benign inflation outlook hosed down expectations for a rate hike any time soon, pushing Treasury yields lower. Investors also remained on edge as Sunday’s deadline for the next round of U.S. tariffs on Chinese goods looms, and ahead of a European Central Bank (ECB) meeting and the UK election later on Thursday. The greenback hit its lowest in more than a month against the euro after the Fed meeting, and sat just above that level at $1.1133 in early Asian trade. Against a basket of currencies the dollar recovered somewhat from an overnight four-month low, but remained subdued at 97.413. The yen crept higher to 108.47 per dollar.

 

The biggest winners were the Australian and New Zealand dollars, which soared as shorts scrambled to exit their positions. Traders said some had bet on a more hawkish Fed outlook. “The Fed was not as optimistic as people thought, and that is consistent with a lower U.S. dollar and the fall in bond yields that we saw,” said Commonwealth Bank of Australia analyst Joe Capurso. Fed Chairman Jerome Powell said the economic outlook for the U.S. was favorable as the central bank announced its decision to hold rates steady, as expected, though forecast only moderate and slowing growth through 2020 and 2021. New economic projections showed 13 of 17 Fed policymakers foresee no change in interest rates until at least 2021. The kiwi dollar  hit its highest since July after that, and was steady at $0.6581 on Thursday. The Aussie added 1% to hit a one-month high, and gave back only a fraction of that in early trade to hover around $0.6868. Bond yields also slid after the decision.

 

Japanese Yen

FXStreet: USD/JPY stays under pressure after declining heavily during the post-Fed meeting session. The market smells fear in the Fed’s dot-plot, Chairman Powell’s speech, US-China trade worries remain on the cards. Japanese Machinery Orders can offer intermediate moves with all eyes on the US tariff decision by December 15. USD/JPY holds modestly changed to 108.55 as Asian traders enter for Thursday’s session. Markets recently responded to the Federal Open Market Committee’s (FOMC) dovish stunt by broad US dollar (USD) weakness.

 

Moving on, Japan’s October month Machinery Orders, expected 0.9% versus -2.9% prior MoM, can entertain short-term traders amid eyes on trade headlines. Also affecting the pair moves will be the election in the United Kingdom (UK). The British election will pave the way for Brexit proceedings. The latest polls signal a hung parliament and further challenges to the likely re-elected present Prime Minister Boris Johnson.

 

Unless providing a daily closing beyond the 200-day Simple Moving Average (SMA) level of 108.80, prices can keep grinding lower to November lows near 107.90.

 

Global Markets

Reuters: Asian stocks edged higher on Thursday after the Federal Reserve signaled rate settings were likely to remain accommodative but the imminent UK election and a deadline for Sino-U.S. trade talks kept investors cautious. Capping broader gains was a fall in oil prices after data showed an unexpected increase in U.S. crude inventories, which hit some energy stocks in the region. The Fed kept interest rates unchanged, as expected, at its policy meeting on Wednesday but indicated interest rates would remain on hold, which nudged Wall Street stocks higher. That helped MSCI's broadest index of Asia-Pacific shares outside Japan  to rise 0.2%. Japan's Nikkei stock index climbed 0.11% and U.S. stock futures rose 0.06%. Australian shares were down 0.29%, however, weighed by the energy sector after the fall in oil prices.

 

Against the euro, sterling was little changed at 84.36 pence, close to the highest since May 2017. The pound traded at $1.3200, just shy of its highest since March. In trade war news, U.S. President Donald Trump is expected to meet Thursday with top advisers to discuss tariffs on nearly $160 billion of Chinese consumer goods that are scheduled to take effect on Dec. 15, three sources told Reuters. Trump is expected to go ahead with the tariffs, a separate source told Reuters, which could scuttle efforts to end a 17-month long trade war between the world’s two-largest economies. The dollar index against a basket of six major currencies traded at 97.413. On Wednesday it fell to a four-month low after Powell it would take a significant pick-up in inflation to cause the Fed to raise rates.Treasury yields initially fell in reaction to Powell’s comments, but they rebounded slightly in Asia. The yield on benchmark 10-year Treasury notes rose to 1.7965%.

 

U.S. crude futures rose 0.26% to $58.91 a barrel in Asia. A report by OPEC released on Wednesday suggested that oil markets are tighter than previously thought. Traders are also focused on state oil company Saudi Aramco (2222.SE), whose shares surged the maximum permitted 10% above their IPO price on their Riyadh stock market debut on Wednesday, making it the world’s most valuable listed company.

 

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