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DAILY BRIEF

 

 

The Daily Brief is sent to subscribers via email each morning and contains news about overnight market movements and insights into the issues of the day. The brief is free and helps keep our clients up to date on the ever changing currency markets. There are currently two daily briefs sent out, the Hong Kong Office sends out the first brief of the day with an updated London version sends out a few hours later.

 

16 / 08 / 19

LONDON OFFICE

 

British Pound

Reuters: Sterling rose on Thursday to the highest in more than a week, supported by news that the opposition Labour Party was mounting a bid to bring down Prime Minister Boris Johnson and stop him taking Britain out of the EU without a deal. The currency also was lifted by better-than-expected retail sales, which came on the heels of Wednesday’s higher inflation numbers that raised hopes the economy might be in better shape than previously thought. Labour said it would call a vote of no-confidence in Johnson’s government as soon as it believes it can win it and would form a temporary government under leader Jeremy Corbyn to delay Brexit. While derivatives indicate market players may be trimming back some short sterling positions, the currency’s prospects remain clouded by the risk of Britain exiting the European Union without a divorce agreement at the end of October.


“The market is not 100% convinced a no-confidence vote will work,” said Jordan Rochester, a currency strategist at Nomura. The risks, alongside fears of a global economic recession, drove yields on British government bond yields to new lows, with the bond yield curve between two-year and 10-year rates remaining inverted — a possible warning of economic recession. This means short-dated Gilts pay a higher yield than their long-dated counterparts. Thirty-year yields fell below 1% and the 10-year yields were at record low around 0.4%. By 1530 GMT, the pound was 0.5% higher at $1.2136, having briefly touched a high of $1.2150. However it remains not far from the 31-month low of $1.2015 it reached on Monday. Analysts said $1.20 was acting as a floor for the pound but the level could be tested if worries of a no-deal Brexit build up again. Investors barely hold any sterling options with strikes below $1.20, according to Refinitiv data, an indication that there would be few buyers for sterling if it falls below this level. Against the euro, the pound rose by 0.8% at 91.7 pence, standing well off recent 10-year lows of 93.26 pence. The cost of protection against unexpected moves in the currency, seen in the three-month options pricing, eased a bit off seven-month highs. Three-month risk reversals, which encapsulate the Brexit deadline, paint a similar picture.

 

US Dollar

Reuters: The dollar held onto gains on Friday after a surge in U.S. retail sales eased concerns about the world’s top economy, but traders cautioned against reading too much into one piece of data given the growing risks to the outlook. The greenback was on course for a weekly gain against safe-haven currencies such as the Japanese yen and the Swiss franc, pointing to some respite for frayed nerves after fears of recession and protests in Hong Kong rattled financial markets. During Asian trading the dollar briefly extended gains and the yen fell as Japanese stocks erased early losses to trade higher and as U.S. Treasury yields rose slightly. The move quickly faded, however, partly reflecting thin trading due to the summer holiday season. Against a basket of six major currencies, the dollar index edged higher to 98.218. Since hitting a three-week low on Aug. 9, the dollar index has recovered, rising around 1%.


Data showing American consumers continued to splurge in July came as a relief to investors after the U.S. bond market sounded alarms of a recession. Yet, the fragile calm in markets is unlikely to last, traders said. This week’s inversion in the U.S. Treasury yield curve, which has historically preceded several past U.S. recessions, has stoked fresh worries about the economic impact of the Sino-U.S. trade war. China on Thursday vowed to counter the latest U.S. tariffs on $300 billion of Chinese goods, but U.S. President Donald Trump said any pact would have to be on America’s terms, suggesting a resolution to the trade war remains elusive. Trump, who is seeking re-election in 2020 and had made the economy and his tough stance on China a key part of his 2016 campaign for the White House, said any agreement must meet U.S. demands. More protests are also expected in Hong Kong over the weekend, which could become a new geopolitical flashpoint and further complicate the U.S.-China trade war. Ten weeks of clashes between police and pro-democracy protesters, angered by a perceived erosion of freedoms, have plunged the Asian financial hub into its worst crisis since it came under Chinese rule from Britain in 1997. “The most important point is there are more signs of a global economic slowdown,” said Tsutomu Soma, general manager of fixed income business solutions at SBI Securities in Tokyo. “Rates will continue to fall, and investors will pull back from risk, which means money will leave emerging markets and go to Treasuries, the Swiss franc, gold, and the yen.” The dollar was little changed at 106.18 yen in Asian trading after rising 0.2% on Thursday. For the week, the greenback was up 0.5% against the Japanese currency, its biggest gain since the week ended July 26. The dollar rose 0.3% to 0.9787 Swiss franc,, on course for a 0.6% weekly gain. A day after inverting, the U.S. yield curve steepened a little. Curve inversion, which occurs when long-term yields dip below short-term yields.

 

South African Rand

EWN: The rand gained more than 1% against the dollar on Thursday, pulling back from a steep sell-off as worries about the global economy eased slightly. The rand has been on a torrid run this month, losing around 6% against the US currency on a dismal domestic growth outlook and fears the United States could tip into recession over its trade war with China. The rand traded at 15.25 versus the dollar by 1630 GMT, around 1.2% stronger than its previous close, after higher-than-expected US retail sales data. Some international investors use the South African currency as a proxy for emerging market risk, making it highly susceptible to swings in sentiment on global markets. Some traders said the recovery in the rand was likely to be short-lived, given grave concerns about the country’s debt trajectory and the sluggish pace of economic reform.


A senior International Monetary Fund representative said on Thursday that South Africa’s public debt was reaching “uncomfortable” levels. On the Johannesburg bourse, stocks recovered some ground lost earlier in the day but still closed weaker, with investors averse to risk a day after an inversion of the US Treasury bond yield curve, a sign some investors see as a harbinger of recession in the world’s largest economy. The Johannesburg Stock Exchange’s All-Share index lost 0.35% to 53,841 points and the benchmark Top-40 was down 0.33% to 48,117 points. Bullion producer Gold Fields led the declines on the blue-chip index, slipping 9.76% to R80.98 after it reported a lower than expected increase in half-year profits. Fellow miners Anglo American Platinum and Anglo American fell 3.79% to R812.12 and 3.49% to R313.18, respectively. South African paper and pulp maker Sappi lost 2.56% to R42.68. The banking index rose 3.55% to 8,340 points. Insurer Discovery closed up 5.26% to R105.91, while Standard Bank increased 4.58% to R173.50 and Absa rose 4.03% to R152.07. “Shares are trading at levels that we’ve last seen - in valuation levels - 10 years ago,” said FNB Wealth and Investments portfolio manager Wayne McCurrie. “They’re cheaper than what they were in the teeth of the financial crisis.”

 

Global Markets

Reuters: A gauge of global equity performance edged lower on Thursday as concerns about global growth offset investor optimism over a surge in U.S. retail sales last month and strong Walmart earnings. Gold prices, which have surged almost 20% since late May on uncertainty driven by the U.S.-Sino trade spat and global growth concerns, edged higher amid concerns about a slowdown after China threatened to retaliate against the latest U.S. tariffs. China called on the United States to meet it halfway on a potential trade deal as U.S. President Donald Trump said any pact would have to be on America’s terms. The yield on 30-year U.S. government debt fell to a record low below 2% and benchmark 10-year Treasury notes dropped to a three-year trough, beaten down by the U.S.-Chinese trade tensions and economic growth concerns. Euro zone government bond yields went further into negative territory, reflecting concerns of an impending global recession after the U.S. yield curve remained inverted for a second day in a row. The inversion is a classic sign of recession.


But Walmart Inc reported strong second-quarter results and raised its earnings expectations for the year, while U.S. retail sales increased 0.7% last month after gaining 0.3% in June, the Commerce Department said. Economists polled by Reuters had forecast retail sales would rise 0.3% in July. Investors are caught between slowing global growth, which is weighing on equity markets, with few alternatives to invest in when the dividends of many stocks are higher than the interest on government debt, said Rick Meckler, a partner at Cherry Lane Investments in New Vernon, New Jersey. “When you get a story like Walmart you see the glass is half full because maybe it’s not as bad as it seems. There are still companies succeeding in this environment, and that’s going to cause the market to go back and forth,” Meckler said. MSCI’s gauge of stocks across the globe shed 0.28%, while the pan-European STOXX 600 index lost 0.17%. Stocks on Wall Street trended lower after earlier gains. The Dow Jones Industrial Average fell 8.38 points, or 0.03%, to 25,471.04. he S&P 500 gained 1.73 points, or 0.06%, to 2,842.33 and the Nasdaq Composite dropped 14.23 points, or 0.18%, to 7,759.71. The dollar recovered from early weakness against the safe-haven yen on the better-than-expected U.S. retail sales. The yen tends to benefit from geopolitical or financial stress as Japan is the world’s biggest creditor nation. The Japanese yen weakened 0.22% versus the greenback at 106.16 per dollar. The dollar index rose 0.15%, with the euro down 0.26% to $1.1109. Oil prices fell more than 1%, extending the previous session’s 3% drop, pressured by mounting recession concerns and a surprise boost in U.S. crude inventories. International benchmark Brent crude fell $1.50 to $57.98 a barrel. U.S. crude was down 61 cents to $54.62.

HONG KONG OFFICE

 

British Pound

FXStreet: GBP/USD extends pullback from a downward sloping trend-line since July 31. The confluence of 100-HMA, 23.6% Fibonacci retracement becomes immediate support. Four-day old support-line adds to the rest-points. Having reversed from a fortnight old resistance-line, GBP/USD takes the rounds to 1.2085 during early Friday morning in Asia.

 

The pair can now aim for 1.2071/70 support confluence including 100-hour moving average (HMA) and 23.6% Fibonacci retracement of July 31 to August 11 downpour, a break of which can further drag the quote to four-day long support-line at 1.2058 now. Should there be increased selling pressure after 1.2058, 1.2040 and the latest low surrounding 1.2015 could be on the bears’ radar.

 

On the upside, 38.2% Fibonacci retracement level of 1.2105 and 200-HMA around 1.2107 can entertain buyers ahead of pushing them to again confront near-term key resistance-line and 50% Fibonacci retracement confluence close to 1.2132/33.

 

US Dollar

Reuters: The dollar held onto gains on Friday after a surge in U.S. retail sales eased concerns about the world’s top economy, but traders cautioned against reading too much into one piece of data given the growing risks to the outlook. The greenback was on course for a weekly gain against safe-haven currencies such as the Japanese yen and the Swiss franc, pointing to some respite for frayed nerves after fears of recession and protests in Hong Kong rattled financial markets. Data showing American consumers continued to splurge in July came as a relief to investors after the U.S. bond market sounded alarms of a recession.

 

This week’s inversion in the U.S. Treasury yield curve, which has historically preceded several past U.S. recessions, has stoked fresh worries about the economic impact of the Sino-U.S. trade war. China on Thursday vowed to counter the latest U.S. tariffs on $300 billion of Chinese goods, but U.S. President Donald Trump said any pact would have to be on America’s terms, suggesting a resolution to the trade war remains elusive. Trump, who is seeking re-election in 2020 and had made the economy and his tough stance on China a key part of his 2016 campaign for the White House, said any agreement must meet U.S. demands.

 

The dollar was little changed at 106.11 yen early in Asian trading after rising 0.2% on Thursday. The dollar was marginally higher at 0.9767 Swiss franc, on course for a 0.4% weekly gain. The pound traded at $1.2111, close to a one-week high of $1.2150.

 

Japanese Yen

FXStreet: USD/JPY was choppy either side of 106.00 overnight but has a downside tendency in Tokyo as bears look for a break below the 50% retracement of the recent lows to recently scored highs that fell just a few pips of 107 the figure. the mood overnight was somewhat more bullish for the Dollar which benefitted from a sharp upside surprise in the retail sales data.

 

Valeria Bednarik, the Chief Analyst at FXStreet, explained that low volumes at the beginning of the European session pushed the pair up to 106.77 although it quickly retreated: "Now trading around 106.00, the pair has a limited upward potential according to intraday technical readings. In the 4 hours chart, the pair is battling with its 20 SMA, while technical indicators turned lower, although lacking strength, the Momentum above its 100 level but the RSI currently at 48. Still below bearish 100 and 200 SMA, the pair has managed to hold above the 20 SMA throughout the day, so it would take a break below 105.50, a strong static support level, to confirm a bearish extension ahead."

 

Global Markets

Reuters: Asian shares were heading for weekly losses on Friday as conflicting messages on the Sino-U.S. trade war only added to worries for the global economy, while talk of aggressive central bank stimulus drove bond yields to fresh lows. U.S. President Donald Trump said on Thursday he believed China wanted to make a trade deal and that the dispute would be fairly short. Beijing on Thursday vowed to counter the latest tariffs on $300 billion of Chinese goods but called on the United States to meet it halfway on a potential trade deal.

 

With no settlement in sight, investors chose discretion over valor. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.17%, to be down 1.4% for the week. Japan’s Nikkei fell 0.5%, making a loss of 1.8% on the week, while commodity-exposed Australia was heading for a weekly drubbing of 2.7%. 

 

Oil prices were trying to bounce after two days of sharp losses. Brent crude futures added 23 cents to $58.46, while U.S. crude rose 33 cents to $54.80 a barrel.

 

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