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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.

 

26 / 05 / 20

LONDON OFFICE

 

British Pound

FXStreet: GBP/USD takes the bids near 1.2215, up 0.20% on a day, while heading into the London open on Tuesday. With the market’s risk-on sentiment weighing over the US dollar, buyers keep the reins as the UK and the US return to trading after a long weekend. Contributing to the US dollar weakness could be the market’s optimism backed by the global policymakers’ efforts to ease the coronavirus (COVID-19) led lockdown restrictions. While the UK PM Boris Johnson announced the opening of all non-essential shops from June 15, not more than 100 people will be able to gather for prayers in Californian churches. Not only the US and the UK, countries in the Middle East and some parts of Asia also showed readiness to restore market activities. As portraying the greenback weakness against currency majors, the US dollar Index (DXY) prints 0.16% loss to 99.62 by the press time.


Other than the USD weakness, the Tory government’s plan to help big firms, including Tata Steel and Jaguar Land Rover, via loans and/or bailouts, also propels the Cable. Even so, the Financial Times (FT) came out with the warning suggesting that the British business should stay ready for a no-deal Brexit. Further on the negative side could be the broad criticism of the UK PM Johnson’s handing of Adviser Dominic Cummings's breach of lockdown restrictions. It’s worth mentioning that China’s Global Times have indirectly warned the UK to not interfere in Hong Kong issue while also alleging it of following the US footsteps on the decisions relating to Huawei despite supporting the firm in January. Moving on, traders will keep eyes on the US-China tussle amid a lack of major data from the UK. While Chinese diplomats have already loaded Global Times’ headlines to hardly downplay the US policies, US President Donald Trump is yet to retaliate on the Asian major’s rush towards securing powers in Hong Kong. The pair’s current run-up seems to aim for a 50-day SMA level of 1.2275 ahead of targeting 1.2300 mark comprising high of May 19. On the downside, Friday’s low near 1.2160 can restricts the pair’s immediate declines ahead of the monthly bottom surrounding 1.2075.

 

US Dollar

Reuters: The dollar inched lower on Tuesday as growing optimism about a global recovery from the COVID-19 pandemic supported riskier currencies, but moves lacked the exuberance of the equities market as Sino-U.S. tensions kept the mood in check. The trade-sensitive Australian and New Zealand dollars each rose about half a percent, but remain below last week’s highs. The Chinese yuan, a barometer of U.S.-China relations, was also mostly left behind by a rally in other Asian currencies. “Markets are caught between two conflicting currents,” said Michael McCarthy, CMC Markets’ chief strategist. “Rising tensions between China and the U.S. are raising concerns, while easing COVID-19 lockdown measures are fuelling growth optimism.” Against a basket of currencies the dollar was marginally softer at 99.618. It inched higher on the Japanese yen to 107.80 and was a tad weaker elsewhere. The Australian dollar rose 0.5% to $0.6571 and the kiwi by about the same margin to $0.6129.


The yuan pared early gains to hold at 7.1326 in onshore trade, not far above a seven-month low of 7.1435 hit on Friday. Trade, the handling of the pandemic and China’s move to impose laws on Hong Kong are all seen as potential catalysts for a further deterioration in already testy U.S.-China relations. The latest salvos came over the weekend, with White House National Security Adviser Robert O’Brien warning of potential sanctions if Hong Kong’s autonomy was undermined, and China’s top diplomat Wang Yi criticising U.S. attacks as a “smear”. “With elections looming, U.S. politicians are compelled to ratchet up the tension in the coming months,” Singapore’s DBS Bank economists said in a note on Tuesday. “A ruinous cold war that hurts global trade, supply chains, efficiency of common standards and geopolitical stability is increasingly on the cards, in our view.” Meanwhile, the economic fallout from the pandemic, and the global policy response, keeps growing and investors are becoming increasingly nervous that a pullback may be due. China’s central bank Governor Yi Gang flagged further easing in an interview published by the People’s Bank of China on Tuesday.

 

South African Rand

Reuters: South Africa’s rand slipped against the dollar on Monday as tension between the United States and China over civil liberties in Hong Kong dented appetite for riskier assets. At 1525 GMT, the rand traded at 17.6750 per dollar, 0.4% weaker on the day, alongside falls in other emerging market currencies like the Russian rouble. Over the weekend, the White House said China could face U.S. sanctions as Beijing pressed ahead with a national security law in Hong Kong that threatens the city’s status as a financial hub. But some economists predicted the rand would resume an upward trajectory before long, after gains of more than 4% against the U.S. currency so far in May. Investec analysts predicted the rand would strengthen towards 16 per dollar by year-end, supported by accommodative monetary policy by major central banks and hopes for a global economic recovery from the coronavirus crisis.


President Cyril Ramaphosa on Sunday announced a further easing in South Africa’s lockdown restrictions from June 1, but the market reaction was muted. South Africa’s economy was in bad shape before the COVID-19 pandemic struck, with repeated bailouts for ailing state firms like power utility Eskom and South African Airways a drain on public finances. On the Johannesburg Stock Exchange (JSE), the Top-40 Index closed down 0.17% at 46,351 points and the broader All-Share Index slipped 0.15% to 50,074 points. Miner AngloGold Ashanti was one of the biggest losers on the blue-chip index, falling 4.3% after it said on Sunday that its Mponeng mine would be closed after 164 workers tested positive for the novel coronavirus. It said shortly after market close on Monday that the number of employees that had tested positive for the virus had risen to 196. Government bonds were slightly firmer on Monday, with the yield on the 2030 bond down 6.5 basis points to 9.05%. JSE data showed offshore investors bought 2.17 billion rand of bonds last week. 

 

Global Markets

Reuters: Asian shares forged ahead on Tuesday while U.S. stock futures breached a major chart barrier as investors looked past Sino-U.S. trade tensions to more stimulus in China and a re-opening world economy. Japan's Nikkei led the way with a rise of 2.6% to its highest since early March when the economic impact of the coronavirus was just becoming clear. MSCI's broadest index of Asia-Pacific shares outside Japan advanced 1.6%, while South Korea rose 1.7%. E-Mini futures for the S&P 500 climbed 1.8% to clear the 3,000 chart level. EUROSTOXX 50 futures added 1.3% and FTSE futures 2.4%. Chinese blue chips firmed 0.8% after the country's central bank said it would strengthen economic policy and continue to push to lower interest rates on loans. While largely reiterations of past comments, they helped offset the war of words between Washington and Beijing over trade, the coronavirus and China’s proposals for stricter security laws in Hong Kong.


“U.S.-China tensions continue to simmer in the background, but equity investors appear more interested on the prospect of economies reopening around the globe,” said Rodrigo Catril, a senior FX strategist at NAB. “On this score, Japan ended its nationwide state of emergency, Spaniards have returned to bars in Madrid wearing masks and England will reopen some businesses on June 1.” There were reports Tuesday that Germany wants to end a travel warning for tourist trips to 31 European countries from June 15 if the coronavirus situation allows. Bond investors suspect economies will still need massive amounts of central bank support long after they reopen and that is keeping yields low even as governments borrow much more. Yields on U.S. 10-year notes were trading at 0.67% having recovered from a blip up to 0.74% last week when the market absorbed a tidal wave of new issuance. The decline in U.S. yields might have been a burden for the dollar but with rates everywhere near or less than zero, major currencies have been holding to tight ranges. In commodity markets, gold edged up 0.1% to $1,731 an ounce. Oil prices were supported by falling supplies as OPEC cut production and the number of U.S. and Canadian rigs dropped to record lows for the third week running. Brent crude futures rose 68 cents to $36.21 a barrel, while U.S. crude gained $1.14 to $34.39.

HONG KONG OFFICE

 

US Dollar

Reuters: The dollar inched lower on Tuesday as growing optimism about a global recovery from the COVID-19 pandemic supported riskier currencies, though concerns about Sino-U.S. tensions held further moves in check. After a quiet start to the week due to holidays in Britain and the United States, the greenback was a fraction softer against most Asian currencies. Against a basket of currencies the dollar was roughly where it ended last week, holding at 99.692. The Japanese yen fetched 107.79 per dollar. The Australian and New Zealand dollars rose about 0.3%, but kept below last week’s highs even as stock markets forged ahead. The Chinese yuan, a barometer of relations between the world's two biggest economies, firmed a bit to 7.1427, though it remains near a two-month low of 7.1465 hit on Friday. The Australian dollar was steady at $0.6559, and the kiwi at $0.6112. ANZ Bank upgraded its forecasts for the Antipodean currencies, but still expects both to fall, with the Aussie forecast at $0.60 and the kiwi at $0.55 in December. 

 

Trade, the handling of the pandemic and China’s move to impose laws on Hong Kong are all seen as potential catalysts for a further deterioration in already testy U.S.-China relations. The latest salvos came over the weekend, with White House National Security Adviser Robert O’Brien warning of potential sanctions if Hong Kong’s autonomy was undermined, and China’s top diplomat Wang Yi criticising U.S. attacks as a “smear”. A third downgrade in Singapore’s growth forecast also provided a fresh reminder of the pandemic’s devastating impact on the global economy. The trade-exposed city-state expects gross domestic product to contract between 4% and 7% this year. Still, from Europe to Japan, restrictions on businesses and movement are lifting and barring a second wave of infections, there is plenty of hope for a swift return to growth.

 

Together with low interest rates, and talk of them heading even lower, the calmer conditions had some investors on the lookout for carry trades. The British pound rose 0.3% to $1.2215 and the euro tacked on 0.2% to $1.0908. “We’ve got the perfect ground right now for Mexican peso or Brazilian real outperformance,” said Chris Weston, head of research at Melbourne brokerage Pepperstone. “It’s basically choose your carry vehicle, or funding currency, and get paid.”

 

Japanese Yen

FXStreet: The offered tone around the Japanese Yen strengthened a few minutes ago, pushing the already bid USD/JPY higher from 107.87 from 107.75 after Bank of Japan's (BOJ) Kuroda warned about downside risks to Japan's economy. "Japan's economy likely to remain in a severe state, prices to remain on a weak note due to pandemic impact, falling oil costs," said Kuroda while speaking in parliament and added further that the risks to Japan's economic outlook are skewed to the downside. 

 

The governor expressed readiness to ease further without hesitation if needed. The central bank has been running a QE program seven years now and has interest rates set below zero for nearly four years. Looking ahead, Kuroda's comments could continue to weigh over the Yen. Also, the futures on the S&P 500 are currently up 1.3% and major Asian equity indices like Japan's Nikkei and Hong Kong's Hang Seng are flashing green. With risk assets gaining ground, the path of least resistance of USD/JPY appears to be on the higher side. At press time, the pair is trading near 107.84, representing a 0.16% gain on the day. USD/JPY has been largely restricted to a range of 108.10 to 107.30 since May 19. 

 

A range breakout looks likely as the US stock market rally is showing no signs of slowing down. As of Friday, the S&P 500 index was up nearly 35% from the low of 2,192 observed in March. The stocks have been able to remain bid despite the escalating US-China tensions and fears of the second wave of coronavirus. According to John Hopkins data, the US recorded 532 coronavirus deaths in the past 24 hours. Meanwhile, China says it had 29 new asymptomatic coronavirus cases in the mainland as of May 25 versus 40 on a preceding day. 

 

Canadian Dollar

FXStreet: USD/CAD drops to the intraday low of 1.3956 amid the initial Asian session on Tuesday. In doing so, the Loonie pair extends the previous day’s losses. Although the absence of the UK and the US traders keep markets confused at the start of the week, the broad risk-on sentiment, as well as upbeat prices of Canada’s main export item crude oil, exerts downside pressure on the quote. 

 

Also contributing to the pair’s weakness could be Canadian PM Justin Trudeau’s recent address wherein the national leader announced additional measures, mostly benefiting workers, to stay positive during the post-coronavirus (COVID-19) working environment. It’s worth mentioning that PM Trudeau also marked his dissent to China’s Hong Kong Bill saying, “Canada remains concerned about a new Chinese bill that experts warn will destroy the last vestiges of the one country, two systems governance model for Hong Kong.” Looking at the risk catalysts, the reopening of the major global economies has offered a ray of hope to the markets following the virus-led disappointment. Recently, California allowed churches to reopen with a limited congregation of below 100. Further to ease the fears could be US President Donald Trump’s refrain from opposing Hong Kong bill during his latest comments.

 

That said, US stock futures register noticeable gains to portray the market’s upbeat risk-tone sentiment. As a result, Dow Futures are up more than 200 points whereas S&P 500 Futures gain over 1.0% by the press time. While the return of the full markets will be the key for today’s trading activity, testimony by the BOC Governor Stephen Poloz will also be important to watch. In his latest comments, the BOC Governor praised the central bank’s performance while citing inflation overreaching goal.

 

Global Markets

Reuters: Asian shares crept ahead on Tuesday following an upbeat session in Europe and further gains in U.S. stock futures as investors looked past Sino-U.S. trade tensions to a re-opening world economy. Japan's Nikkei led the way with a rise of 1% to its highest since early March when the economic impact of the coronavirus was just becoming clear. MSCI's broadest index of Asia-Pacific shares outside Japan added 0.1% in early trade, while South Korea rose 0.4%. While Wall Street had been shut on Monday, E-Mini futures for the S&P 500 were up just over 1% after EUROSTOXX 50 futures added over 2% on Monday. European sentiment got a lift when a survey showed German business morale rebounded sharply in May as activity gradually returned to normal after weeks of lockdowns. That helped offset the war of words between Washington and Beijing over trade, the coronavirus and China’s proposals for stricter security laws in Hong Kong. 

 

“U.S.-China tensions continue to simmer in the background, but equity investors appear more interested on the prospect of economies reopening around the globe,” said Rodrigo Catril, a senior FX strategist at NAB. “On this score, Japan ended its nationwide state of emergency, Spaniards have returned to bars in Madrid wearing masks and England will reopen some businesses on June 1.” Bond investors suspect economies will still need massive amounts of central bank support long after they reopen and that is keeping yields low even as governments borrow much more. Yields on U.S. 10-year notes were trading at 0.65% having recovered from a blip up to 0.74% last week when the market absorbed a tidal wave of new issuance. The decline in U.S. yields might have been a burden for the dollar but with rates everywhere near or less than zero, major currencies have been holding to tight ranges. 

 

Analysts at CBA felt the dollar could break higher should China-U.S. tensions actually threaten their trade deal. “Although not our central scenario, if the U.S. or China were to withdraw from the Phase One deal, USD would sharply appreciate while CNH, AUD and NZD would decline,” they wrote in a note to clients. In commodity markets, gold edged down 0.1% to $1,727 an ounce. Oil prices were supported by falling supplies as OPEC cut production and the number of U.S. and Canadian rigs dropped to record lows for the third week running. Brent crude futures rose 12 cents to $35.65 a barrel, while U.S. crude gained 67 cents to $33.92. 

 

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