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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.

 

15 / 10 / 21

British Pound

Reuters: Sterling hit a two-week high on Thursday, adding to the previous session’s gains, as traders focused on hopes that a post-Brexit trade war with the European Union will be avoided and on expectations the Bank of England will raise rates this year. The pound was also helped by the dollar’s weakness as upbeat sentiment lifted stock markets and risk-oriented currencies such as sterling. At 1456 GMT sterling was up 0.16% versus the dollar after having earlier reached a high of $1.3734, its highest level since Sept. 24.


Against the euro, the pound rose 0.17% after touching a two-month high of 84.52 pence during morning trading. The pound jumped against the dollar on Monday after BoE governor Andrew Bailey stressed the need to prevent inflation from becoming permanently embedded, and fellow policymaker Michael Saunders said households must brace for “significantly earlier” interest rate rises. On Thursday, BoE policymaker Silvana Tenreyro said raising interest rates to tackle a surge short-term inflation bumps could be counter-productive. “Typically, for short-lived effects on inflation, such as the big rises in the prices of semiconductors or energy prices, it would be self-defeating to try to respond to their direct effects,” she said.


Investors are closely watching for any signs that the markets may have got ahead of themselves in pricing a rise in British interest rates before the end of the year. The BoE, facing a rise in inflation, looks set to be the first major central bank to raise interest rates since the beginning of the pandemic. For some analysts, Britain’s negotiations with Brussels to ease the transit of goods to Northern Ireland and general post-Brexit tensions are likely to keep a lid on the pound. “The British Premier got things wrong so frequently during the Brexit negotiations that a stubborn British position only entails further political and economic risks”, argued Commerzbank strategist Ulrich Leuchtmann. “Those make a stronger Sterling impossible, despite rapid Bank of England rate hikes”, Leuchtmann said, adding that despite hawkish comments from BoE policymakers, “sterling was only able to retrace the losses recorded in September”.


So far, the EU’s proposals to slash paperwork and checks on food and medicines coming into Northern Ireland from mainland Britain have been cautiously welcomed by Northern Irish business groups. As far as economic indicators are concerned, data this week, including UK jobs figures for September came roughly in line with forecasts. Britain’s economy grew 0.4% in August, leaving it just 0.8% smaller than it was in February 2020, the Office for National Statistics said on Wednesday. Economists polled by Reuters had forecast monthly gross domestic product growth of 0.5% for August. 

 

US Dollar

Reuters: The dollar headed for its first weekly decline versus major peers since the start of last month, falling back from a one-year high as traders turned their attention to when the U.S. Federal Reserve will start raising interest rates. The dollar index, which measures the greenback against six rivals, slipped 0.1% to 93.945 on Friday. It is on track for about a 0.19% decline this week despite hitting the highest since Sept. 25 of last year at 94.563 on Tuesday. Improved market sentiment, which has lifted global stocks, commodity prices and bond yields, is also weighing on the safe-haven dollar.


Only against the yen - another currency seen as a haven - has the dollar managed to maintain the momentum of the past five weeks, rising 0.33% on Friday and touching 114.075 yen for the first time since December of 2018. “We end the week with risk flying,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note. “Equities are going up hard, and the JPY has no place as a hedge,” because it would just drag on overall portfolio performance, Weston said. The greenback had rallied since early September on expectations the U.S. central bank would tighten monetary policy more quickly than previously expected amid an improving economy and surging energy prices. Minutes of the Fed’s September meeting confirmed this week that a tapering of stimulus is all but certain to start this year, although policymakers are sharply divided over inflation and what they should do about it.  Money markets are currently pricing in about 50/50 odds of a 25 basis point rate hike by July. The dollar index is “looking a little shaky, but any slippage should prove modest” with Fed tapering now imminent, Westpac strategists wrote in a client note. Any dips in the index should be limited to 93.70, they said.


The next major glimpse of the U.S. economy’s health comes later on Friday with the release of retail sales figures. While traders see the risks for an earlier rates lift-off, they have also priced a lower terminal rate, with the projected one-year rate five years from now falling to 1.63% from 1.97% over the course of the week, Ray Attrill, head of FX strategy at National Australia Bank, wrote in a client note. “This drop in terminal Fed Funds pricing might go some way to explaining why the USD sits slightly lower on the week,” he said. The euro edged up 0.08% to $1.16065 after touching $1.1624 on Thursday for the first time since Sept. 4. Sterling was 0.1% higher at $1.36835 following its climb to the highest since Sept. 24 at $1.3734 overnight. The risk-sensitive Aussie dollar added 0.1% to $0.7423, approaching the more than one-month high of $0.74265 of the previous session. New Zealand’s kiwi dollar jumped 0.35% to $0.70585, extending Thursday’s 1% surge. It earlier touched $0.7060, the highest since Sept. 24 at $0.70415.


In cryptocurrencies, bitcoin rallied as high as $60,000, an almost six-month peak, as traders became increasingly confident that U.S. regulators would approve the launch of an exchange-traded fund based on its futures contracts. Smaller rival ether rose as high as $3858, the highest since Sept. 7.

 

South African Rand

Reuters: The South African rand was steady against the dollar on Thursday, taking a breather after two days of strong gains. At 1600 GMT, the rand3 traded at 14.7975 against the dollar, close to its previous close of 14.7950. The dollar edged down on global markets. This week the rand has been boosted by market bets that the South African central bank would raise its main lending rate at its next monetary policy meeting in November, as well as an increase in the gold price and demand for local bonds.


It shrugged off mixed domestic economic data, including August manufacturing and mining numbers, which reinforced the view that the economic recovery from the COVID-19 pandemic has been uneven across sectors. Stocks advanced, with the Johannesburg Stock Exchange's Top-40 Index rising 1.47% to 60,391 points and the broader All-Share Index climbing 1.26% to 66,846 points. Miners topped the blue-chip index for the second day in a row as gold continued to rise to a one-month high. Platinum and other precious metals were also on the up. Impala Platinum was the biggest winner, rising 4.42%, followed by Glencore, Anglo American and BHP Group, all up more than 3%.

 

Global Markets

Reuters: U.S. shares rallied on Thursday as strong bank earnings reports fired up investors’ risk appetites, while the dollar and benchmark Treasury yields both paused their recent ascent to pull back from multi-month highs. But soaring oil prices climbed yet again, keeping inflation pressures alive and supporting bets that central banks could tighten policies and hike interest rates sooner than expected. In the United States, data that showed producer prices posting their smallest gain in nine months in September showed inflation risks were real, but perhaps not as dire as some imagined.


Indeed, any worries about rising prices were eclipsed on Thursday by signs that the economy and businesses are thriving, as the number of Americans filing new claims for jobless benefits dropped below 300,000 last week for the first time in 19 months. The dollar, driven to a more than one-year high this week by growing bets on a U.S. interest rate rise in 2022, eased for a second day along with the 10-year U.S. Treasury yield, which tends to drive global borrowing costs. “So far bank earnings have been strong. It gives traders some hope we will see a strong earnings season,” said Tim Ghriskey, Chief Investment Strategist at Inverness Counsel in New York. “But if we start to see poor guidance from companies, the market could come right back down.” The Dow Jones Industrial Average jumped 1.57%, the S&P 500 climbed 1.46%, and the Nasdaq Composite leapt 1.68%. The mood was buoyant after U.S. lenders Wells Fargo & Co, Citigroup Inc and Bank of America Corp all reported profits that beat market expectations. The pan-European STOXX 600 index rose 1.20% and MSCI’s gauge of stocks across the globe gained 1.34%.


Foreign exchange and commodity markets were sending some mixed signals. Gold, often seen as a hedge against rising inflation, added to gains after enjoying its best session in seven months on Wednesday. Spot gold rose 0.3% to $1,797.49 an ounce, and U.S. gold futures climbed 0.26% to $1,798.40 an ounce. Oil bulls pushed Brent crude back towards $85 a barrel. Brent climbed 0.57% to $83.65, and U.S. crude rose 0.62% to $80.96 per barrel. Natural gas climbed 2%, having already soared more than 150% this year, driving the spike in global energy prices. 

The dollar, meanwhile, pulled back, allowing the likes of the euro, British pound, Australian and New Zealand dollars to all regain ground. The dollar index edged down 0.05%, with the euro steady at $1.1595. Expectations the U.S. Federal Reserve will tighten U.S. monetary policy more quickly than previously assumed saw the greenback hit a more-than year high on Tuesday, but it is now down for October. “It seems to be a classic case of ‘Buy the rumour, sell the fact’-type mentality,” said Neil Jones, head of FX sales at Mizuho, about the dip in the dollar. “The Fed confirmed the expectations of many investors, I would suggest, holding long dollar positions.” Benchmark 10-year Treasury yield retreated to 1.5107%, from Wednesday’s 1.549%. The two-year Treasury yield also fell to 0.3501%, from 0.368% the previous day. 

 

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