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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.

21 / 09 / 21

British Pound

Reuters: Sterling hit a one-month low against the dollar on Monday as a global sell-off prompted by China’s struggling Evergrande hit risk-oriented currencies while uncertainties about the Bank of England’s monetary policy and surging gas prices also weighed. At 0827 GMT, the pound was about 0.5% lower against the dollar at $1.3662, its lowest level since Aug. 23. Versus the euro, sterling was down 0.32% at 0.8561 pence, a low not reached since Sept. 9. A sell-off in Asia where the world’s most indebted property developer China’s Evergrande plunged to over 11-year lows spread to Europe with the pan-European STOXX 600 falling 1.90% and London’s FTSE 100 1.55%.


Investors turned to the safe haven of the greenback which firmed to a four-week high, with the dollar index reaching 93.4. “What we are seeing is all risk currencies taking a hit across the board”, said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets. He added that domestic factors were also at play for the British currency, with the surge in gas prices causing an additional headwind. Britain is considering offering state-backed loans to energy firms after wholesale gas prices soared, prompting big suppliers to ask for support from the government to cover the cost of taking on customers from companies that have gone bust.


Another headache for traders were the uncertainties linked to what could emerge about the future of monetary policy at the Bank of England meeting on Thursday. “The market had been expecting a relatively hawkish” tone from the BoE, Stretch said, adding that risks to the economic recovery have been creeping up recently and that investors might reconsider long bets on a strengthening currency. BoE rate-setters who may be tempted to vote next week for an early end to their COVID-19 stimulus plans are likely to hold off for now, with a slowing economy but surging inflation making for a tricky backdrop. Last month, Michael Saunders was the only Monetary Policy Committee member to vote for an early end to the British central bank’s purchases of government bonds, on the basis that continued buying risked a more aggressive tightening of monetary policy in future. Since then, BoE Governor Andrew Bailey revealed that four of the eight MPC members who voted last month - himself included - thought some initial conditions had been met to begin exploring the possibility of raising interest rates.

 

US Dollar

Reuters: The offshore yuan wallowed near an almost one-month low on Tuesday while the safe-haven dollar and yen stood tall as investors sought shelter from a potential China Evergrande default. The New Zealand dollar also sank after the central bank’s assistant governor poured cold water on bets for a 50 basis point rate hike next month. The yuan stood at 6.4805 per dollar after weakening as far as 6.4879 on Monday for the first time since Aug. 23. Mainland markets are shut for holidays until Wednesday.


“It feels like the market was waiting on something from the Chinese authorities over the weekend to calm the markets and ringfence the contagion worries from a looming Evergrande default, and that didn’t come,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note. “Traders sense a credit event is coming.” Analysts at Wells Fargo expect the dollar to reach 6.60 per yuan in the next month for the first time since November. The U.S. currency had already been rising on expectations the Federal Reserve will signal a start to stimulus tapering at a two-day policy meeting that ends Wednesday.


The greenback was mostly flat at $1.17245 per euro after gaining to $1.1700 overnight, also a first since Aug. 23. The yen eased back about 0.2% to 128.50 to the single currency, but still close to its high of 128.155 from Monday, a level not seen since Aug. 20. The dollar rose 0.18% to 109.58 yen, trimming some of its overnight losses, but with the pair still meandering near the middle of the trading range of the past 2-1/2 months. The Bank of Japan decides policy on Wednesday, with no change expected to its massive stimulus programme.


The dollar index, which measures the currency against six major peers, was little changed at 93.2241 after rising overnight to 93.455 for the first time since Aug. 23. Market sentiment has been rattled by potential contagion from Evergrande, which is trying to raise funds to pay a host of lenders, suppliers and investors. A deadline for an $83.5 million interest payment on one of its bonds is due on Thursday, and the company has $305 billion in liabilities. On Monday, Chinese regulators warned that the company’s insolvency could fuel broader risks in the country’s financial system if not stabilised. Moves in Hong Kong’s Hang Seng could dictate the direction for the Australian dollar and other commodity-linked currencies in the near term, Pepperstone’s Weston said.


The Aussie edged 0.07% higher to $0.7258 after dipping to $0.72205 in the previous session for the first time since Aug. 24. New Zealand’s kiwi dropped 0.3% to $0.7011, approaching Monday’s low of $0.7006, the weakest level this month. A 50 basis point hike to the RBNZ’s policy rate looks unlikely after the text of a speech from Assistant Governor Christian Hawkesby hinted that the central bank would move in 25 basis point increments. Sterling was little changed at $1.3662 after sliding to a nearly one-month low of $1.3640 overnight. The Bank of England announces a policy decision on Thursday. The loonie regained some footing having hit a one-month low of C$1.2896 against its U.S. counterpart overnight heading into national election that could heighten political uncertainty in Canada. The dollar slipped 0.15% to C$1.2805 in Asia.


Cryptocurrencies were also hurt by the turn in risk sentiment, with bitcoin down more than 3% to around $41,700 on Tuesday after earlier touching $40,192.90 for the first time since Aug. 6. Smaller rival ether also slid around 3% to $2,891.77, after dipping to $2,803.20, also a first since Aug. 6.

 

South African Rand

Reuters: South Africa's rand weakened on Monday, tracking other risk and commodity currencies, as concerns about property group China Evergrande's solvency stoked risk aversion, while traders awaited the outcome of this week's U.S. Federal Reserve policy meeting. At 1500 GMT, the rand was trading at 14.7900, down 0.73% from Friday's close, and having lost more than 4% since Sept. 10. The dollar climbed as investors turned risk averse amid concerns around debt-laden Chinese developer Evergrande's inability to pay part of its huge debt due on Thursday.


The Chinese developer's woes come in the midst of several regulatory crackdowns by Chinese authorities on digital companies, eroding investors' confidence in the world's second biggest economy and instilling fears around its prospects. Investors will also be closely watching the South African Reserve Bank's monetary policy meeting news conference on Sept. 23 to get a steer on where interest rates are headed in the continent's most advanced economy. The market will also track local Consumer Price Index (CPI) numbers on Sept. 22 and the U.S. Federal Reserve's policy meeting, due to end on Wednesday, for indications on when it will start tapering its bond purchase programme.


"Global financial market sentiment, and the rand, would be further weakened from current levels if the Fed says this week that it would, as opposed to may, be appropriate to start reducing asset purchases this year," said Investec economist Annabel Bishop. South African government bonds also weakened, and the yield on the instrument due in 2030 up 7.5 basis points to 9.060%. Stocks too were down, with the Johannesburg Stock Exchange's Top-40 Index slipping 2.4% to 55,246 points and the broader All-Share Index losing 2.2% to 61,453 points. Insurer Discovery, which has exposure to the Chinese market via a partnership with fellow insurer Ping An 601318.SS, was the biggest loser on the blue-chip index, shedding 6%.

 

Global Markets

Reuters: Asian stocks struggled to shake off contagion fears on Tuesday and selling pressure persisted amid concern that troubles at indebted developer China Evergrande could ripple across the world economy, markets and financial system. Hong Kong’s Hang Seng hit a fresh 11-month low and was down 0.3% by midsession, with a early gains in banks and property stocks paring a little. Japan’s Nikkei returned from a market holiday with a drop of almost 2%. Currency, commodity and bond markets steadied, but overall demand for riskier assets remained low especially as the Federal Reserve is expected to step closer to tapering on Wednesday.


European futures rose 0.5% in the Asia session. FTSE futures advanced 0.7% and S&P 500 futures climbed 0.6% a day after selling hit banks on both sides of the Atlantic and tipped the S&P 500 to its steepest fall in two months. “For markets to bounce we need to see concrete actions from the authorities to stem any wide spread contagion,” said Dave Wang, a portfolio manager at Nuvest Capital in Singapore. Though China is on holiday, and mainland markets closed, there was little evidence of that yet, with no mention of Evergrande’s troubles in major Chinese state media. Evergrande, struggling for cash, owes $305 billion and investors are on edge at the risk a messy failure reverberates through China’s property sector and everything exposed to it - primarily banks and then the broader economy. China’s yuan steadied in offshore trade to recoup some of the losses that sent it to a three-week low on Monday. Evergrande shares fell 4% as focus there shifts to Thursday when the company is due to make bond interest payments.


Australia’s stock market was also barely better than flat as iron ore miners BHP and Rio Tinto scraped from nine-month troughs plumbed on Monday. Copper hovered near a one-month low on demand fears. “There is market caution,” said George Boubouras, head of research, at K2 Asset Management in Melbourne. “However the profit and earnings cycle is far from a bear market,” he said. “Evergrande is a sentiment issue, no doubt. But no Lehman event ... it will be addressed, bailed out or restructured if it becomes a notable mainland China problem.” The next few days present yet more tests, with the Federal Reserve concluding a two-day meeting on Wednesday and likely to offer some guidance on the tapering outlook and with Evergrande due to meet its bond interest payments on Thursday.


In the currency market, traders took solace from the relative calm in Hong Kong after Monday’s plunge. The euro traded at $1.1730, after having touched a near-one-month low of $1.1700 while the safe-haven yen slipped to 109.57 yen to the dollar. The 10-year U.S. Treasury yield crept up to 1.3277%, with moves capped as markets have an eye to the Fed. Investors are looking for the tapering timeline on its bond purchases as well as its board members’ long-term rates and economic projections. “I think the Fed will calm things down and I guess defer their tapering decision till November, said Jarrod Kerr, chief economist at Kiwibank. This week will also see policy decisions from many other central banks spanning Brazil, Britain, Hungary, Indonesia, Japan, Norway, the Philippines, South Africa, Sweden, Switzerland, Taiwan and Turkey.


Oil prices also rebounded a tad in Asia after falling the previous day. U.S. crude futures traded at $70.98 per barrel. Wobbling cryptocurrencies also found a floor, with bitcoin bouncing from a 1 1/2-month low of $40,193 to trade just shy of $43,000.

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