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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.

 

18 / 06 / 19

LONDON OFFICE

 

British Pound

Reuters:The pound held near a five-month low against the euro on Thursday after Boris Johnson won by far the most support from Conservative lawmakers in the first round of the contest to replace Prime Minister Theresa May. Johnson, the face of the official campaign to leave the European Union in the 2016 referendum, won the support of 114 Conservative lawmakers in the first round of the contest to replace May. Currency markets were little moved despite the large gap between Johnson and Jeremy Hunt, the foreign minister who won 43 votes, coming a distant second, with markets waiting for the results of further rounds of voting. “The pound has not really moved on the news as investors are waiting to see if there is a strong candidate that will emerge from subsequent rounds,” said Nikolay Markov, a senior economist at Pictet Asset Management. 


The second round is due on June 18 with further ballots planned for June 19 and June 20 until there are just two candidates. A postal ballot of the wider Conservative Party membership will then be held to pick a leader. Against the euro, the pound was holding near a five-month low of 89.31 pence hit earlier this week. Versus the dollar, the pound was broadly steady at $1.2681.Broader market sentiment has also conclusively turned negative against the British pound in recent weeks with net speculative positions flipping towards a bearish position as concerns about Britain crashing out of the European Union without a deal has grown. However with a U.S. Federal Reserve meeting due next week where policymakers might strike a dovish stance amid growing trade tensions, investors were wary of taking large negative bets on the pound.

 

US Dollar

Reuters:The dollar trod water on Friday and was set to show a weekly rise as investor focus turned to next week’s Federal Reserve meeting for hints on a possible rate cut in light of rising risks to trade and global growth. The Federal Open Market Committee’s (FOMC) two-day policy meeting is set to begin on Tuesday. With trade tensions rising, U.S. growth slowing and hiring in May declining, markets have priced in at least two rate cuts by the end of 2019. There was only a 13.4% expectation on Thursday that U.S. interest rates will be at current levels in July of this year, compared to 74.1% a month ago, according to the CME Group’s FedWatch tool. “Ahead of the FOMC meeting, people are expecting dovish comments from the Fed, which is weighing on the dollar in general,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. “However, other currencies like euro and sterling are weak and their weakness is helping the strength of the dollar,” he said. Investors’ attention on Friday will also be on U.S. retail sales data due later in the global day for insights into the state of domestic demand in the world’s biggest economy. 


Market participants were also keeping a close eye on geopolitical issues including the months-long Sino-U.S. trade conflict and U.S.-Iran tensions following Thursday’s attacks on tankers in the Gulf of Oman. Washington quickly blamed Iran for the attacks, but Tehran denied it was responsible. Geopolitical risks have risen to the fore quite strongly over the recent days. The dollar index against a basket of six rivals was basically unchanged at 97.001, and on track for a near 0.5% gain this week. The index had touched an 11-week low of 96.459 last Friday. The Federal Open Market Committee’s (FOMC) two-day policy meeting is set to begin on Tuesday. With trade tensions rising, U.S. growth slowing and hiring in May declining, markets have priced in at least two rate cuts by the end of 2019.

 

South African Rand

News24: The rand had lost all of its gains and opened far weaker on Thursday morning while Peregrine Treasury Solutions's Bianca Botes said that US President Donald Trump was fuelling currency jitters yet again. Just when you think that emerging markets finally have a chance to regain some momentum, President Trump moves in," said Botes. Not even an 'extremely beautiful letter' from Chinese president Xi could deter Trump from once again fuelling the trade war jitters, categorically stating that unless China agrees to a few contentious matters, a trade agreement will not be reached. "Retail and manufacturing data point to a recovery in the local economy in Q2 2019, however calls for the SARB to cut rates are intensifying, which is also not doing the rand any favours. Currency markets largely hinge on the US president’s Twitter account and once again we are looking towards China and the US to ease market fears.


The rand was flat against the dollar on Thursday afternoon, as geopolitical events continue to drive market sentiment. Earlier this week, US President Donald  Trump also threatened to impose sanctions on Berlin for supporting the Nord Stream 2 natural gas pipeline from Russia to Germany. “The risk environment is faltering globally, despite a weaker out-turn in US monthly inflation that reinforced expectations of US Federal Reserve cuts, as negative trade rhetoric overshadowed any fundamental improvements in conditions for emerging-market assets,” said Rand Merchant Bank analyst, Nema Ramkhelawan-Bhana. “The US remains the common antagonist in global geopolitical spats.” By 2.10pm, the rand was little changed at R14.8596/$ and R16.7743/€.

 

Global Markets

Reuters:Asian stocks sagged some more on Friday ahead of key Chinese data that could provide more clues on how heavily the U.S.-Sino trade war is weighing on the economy, while oil prices were supported by supply concerns after attacks on tankers in the Gulf of Oman. European shares looked to set open slightly higher, however, following overnight Wall Street gains. Pan-region Euro Stoxx 50 futures were up 0.09%, German DAX futures edged up 0.1% and Britain’s FTSE futures added 0.18%. China will release May industrial production along with retail sales and investment numbers at 0700 GMT, and analysts expect any improvement from April’s downbeat readings will be mostly marginal. Economists polled by Reuters expect industrial production in China to have risen 5.5% in May from 5.4% in April and believe retail sales increased 8.1% from 7.2% the previous month. But even if the data is better than forecast, expectations of more stimulus in China are growing as the Sino-U.S. trade dispute threatens to escalate into a full-blown trade war that could push the global economy into recession.


MSCI’s broadest index of Asia-Pacific shares outside Japan edged down 0.3%. For the week, it was headed for a gain of 0.9%, as global stock markets were lifted by factors including expectations for Federal Reserve rate cuts and relief over a U.S.-Mexico immigration deal that averted damaging tariffs. Despite expectations that Beijing will announce more support measures soon, nervousness ahead of the activity data and worries over trade pushed the Shanghai Composite Index down 0.3%. But Australian stocks added 0.15% and Japan’s Nikkei climbed 0.3%. “Risk assets have been struggling for direction as competing themes battle to decide the tone of global risk sentiment,” wrote strategists at ANZ. “On one hand, the prospect of Fed easing assuages some fear of a global slowdown, but on the other hand trade issues still present downside risk.” U.S. stocks rose on Thursday after two days of declines, with energy shares rebounding on the back of crude oil’s surge. Wall Street shares have had a strong run in June on hopes the Federal Reserve will ease monetary policy soon to counter pressure on the U.S. economy from the escalating trade war. The S&P 500 index is up about 5% so far for the month. The Fed’s June 18-19 meeting will give investors an opportunity to see if the Fed’s monetary policy stance is in sync with market expectations for a near-term rate cut. The dollar index against a basket of six major currencies was little changed at 97.074 after ending the previous day nearly flat, with caution ahead of the next week’s Fed meeting keeping the greenback in a tight range.

HONG KONG OFFICE

 

British Pound

Reuters: The British pound on Tuesday languished near this year’s low on rising worries Boris Johnson, the front-runner to replace UK Prime Minister Theresa May, could put Britain on a path towards a dreaded no-deal Brexit. Worries about Brexit hit the British pound, which tumbled to a 5-1/2-month low of $1.2532 on Monday and last traded at $1.2539. Sterling also fell to its weakest level since January against the euro, which climbed to 89.50 pence, compared to a two-year low of 84.56 touched just over a month ago.

 

Former foreign minister Boris Johnson got a boost on Monday in his campaign to succeed May as one of his former rivals and EU supporter Matt Hancock backed him. That rattled markets as Johnson, the face of the official campaign to leave the European Union in the 2016 referendum, has promised to lead the United Kingdom out of the EU with or without a deal.

 

The pound could be in for a rough ride in coming days, with a raft of potentially market-moving events ahead, including consumer inflation and retail sales data, due on Wednesday and Thursday respectively, and the Bank of England’s policy announcement on Thursday.

 

Australian Dollar

FXStreet: AUD/USD is currently trading at 0.6853, within a tight and early Asia range of between 0.6849/55 ahead of the RBA minutes today. Meanwhile, price action was rather dull overnight as well as we await direction from the Federal Open Market Committee (FOMC) which meeting starts today and concludes on Asian Thursday.  "While no change to interest rates is expected, we expect an acknowledgement of the deterioration in the international environment and downside risks for growth," analysts at ANZ Bank explained. 

 

Meanwhile, the RBA Minutes are going to be a key event for the Asian session. "The Governor’s speech on the eve of his first policy easing, earlier this month, has diminished the importance of the RBA’s minutes (due today)," the analysts at ANZ Bank explained, adding, "Usually, we would look to them for a more detailed assessment of the decision that was made, but with the Governor having already laid out the boards assessment, the minutes will likely provide little more than some additional information on the RBA’s view on recent trend in the labour market."

 

AUD/USD reached a 78.6% retracement level at 0.6857 and now consolidates. Analysts at Commerzbank explained that there are two 13 counts on the 240 minute chart and they will now exit remaining short positions and reattempt longs: "Initial upside target is the 55-day ma at 0.7008, 0.7022 the June peak and the April peak at 0.7069. Further up resistance can be spotted at the 0.7207 February high. A rise above the 0.7207 late February high would target the December 2018 high at 0.7394."

 

Japanese Yen

FXStreet: USD/JPY has started out in Tokyo within a tight range between 108.50 and 108.58, currently at 108.51. Overnight, the pair was also trading in a tight range, despite a drop in US yields. US 10yr treasury yields fell from 2.11% to 2.08%, partly in response to the US data, while 2yr yields mostly ranged sideways between 1.85% and 1.88%, awaiting the Fed meeting on Wednesday. 

 

Looking ahead, the FOMC is coming up, as well as the BoJ. The main focus will stay with the Fed and while markets are pricing little chance of a cut this week, there is a 90% chance of a Fed fund rate cut by the July meeting, and this meeting around is expected to be uber-dovish. The dots will make up the market's mind as to how many cuts are likely to follow later in the year. Currently, markets are pricing in a total of three cuts priced by December.

 

Valeria Bednarik, Chief Analyst at FXStreet explained that from a technical point of view, the pair continues in consolidative mode, hovering around the 38.2% retracement of the 109.92/107.81 slide, unable to settle above the level: "In the 4 hours chart, technical readings offer a neutral stance, with the price trapped between moving averages, holding above a flat 20 SMA but below a bearish 100 SMA. Technical indicators in the mentioned chart hold right above their mid-lines, lacking directional strength."

 

Global Markets

Reuters: Investor caution ahead of the Federal Reserve’s interest rate meeting capped Asian stocks on Tuesday, while crude oil prices retreated as global growth worries overshadowed supply concerns stemming from recent Middle East tensions. MSCI’s broadest index of Asia-Pacific shares outside Japan inched up 0.05%. Australian stocks added 0.1% while Japan’s Nikkei dipped 0.05%.

 

U.S. crude oil futures shed 0.08% to $51.89 per barrel after retreating 1.1% the previous day. Oil prices had slipped on Monday as weak Chinese economic data released at the end of last week led to fears of lower global demand for the commodity. Concerns over weakening demand overshadowed tensions in the Middle East, which remained high following last week’s attacks on two oil tankers in the Gulf of Oman.

 

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