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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.

 

23 / 08 / 19

LONDON OFFICE

 

British Pound

Reuters: The pound was on course for its best day in months on Thursday after traders interpreted comments from German Chancellor Angela Merkel to mean that a solution to the Irish border problem could be found before Britain leaves the European Union on Oct. 31. Traders have been betting heavily against the currency this summer and so any glimmer of a breakthrough in Britain’s efforts to convince the EU to renegotiate the deal is likely to send the pound jumping, analysts and traders say. Merkel on Thursday backtracked on earlier comments that appeared to set Britain a 30-day deadline to find a solution to the so-called Irish backstop. Instead she said that the UK could have time until the Brexit deadline of Oct. 31 to find a compromise.


Deciding how to prevent a hard border dividing Northern Ireland from the Republic of Ireland after Brexit is at the heart of Britain and the EU’s inability to come up with a mutually acceptable withdrawal deal. British Prime Minister Boris Johnson wants the backstop - an insurance policy included in Britain’s Withdrawal Agreement with the EU to avoid the return of a hard border on the island of Ireland - scrapped. The EU says the current plan, which was approved by Johnson’s predecessor Theresa May, is not up for renegotiation. Sterling jumped to a three-week high of $1.2265 after Merkel’s comments before settling around $1.2251, up 1.1% on the day. Against the euro, sterling rose as high as 90.29 pence, also a three-week high, and was last up 1.1% at 90.49 pence. The euro zone equity benchmark swung into positive territory and hit the day’s high after the comments, though it gave back some of the gains afterwards. London’s exporter-heavy FTSE 100 fell as stronger sterling puts exporting companies under pressure. Some investors, however, remain doubtful about Johnson’s ability to convince European leaders to reopen Brexit negotiations and find a deal by October. Johnson has said Britain will leave the EU on Oct. 31 with or without a deal. A solution to the Irish backstop can be found “but no one has managed to do that in the past 2.5 years,” said Marc Ostwald, global strategist and chief economist at ADM Investor Services. Moreover, “she (Merkel) has said nothing new,” Oswald said. Sterling was already trading higher on Thursday despite the fact that French President Emmanuel Macron told Johnson that it was for him to choose Britain’s destiny after Brexit. “We are not really any closer to finding a solution. Macron has met Johnson with scepticism. The markets are biased towards the optimistic view because everyone still thinks that given the negative consequences of no-deal Brexit for both sides a solution will be found,” said Esther Maria Reichelt, an FX strategist at Commerzbank. “It’s a classic prisoners’ dilemma.”

 

US Dollar

Reuters: The dollar edged higher versus the yen on Friday on expectations a pivotal speech by Federal Reserve Chairman Jerome Powell will reinforce that the U.S. central bank has not entered a prolonged monetary easing cycle. The greenback hit another 11-year high versus the Chinese yuan on Friday, while the British pound retreated from a more than three-week high. The New Zealand dollar was the bigger mover on the day, jumping from a three and-a-half-year low after the Pacific nation’s central bank chief said he was “pleased” with where interest rates were, hosing down expectations of more immediate rate cuts to follow this month’s aggressive easing. Powell gives the highly-awaited speech later Friday at a meeting of central bankers in Jackson Hole. Doubts about further easing emerged after two Fed officials said they saw no reason to cut interest rates again without new signs of economic weakness.


Currency markets have in recent months been driven by global central banks’ shift to much more accommodative policy settings as economic demand slows and trade disputes intensify. Expectations that the Fed will cut rates at its next meeting in September are still very high, according to interest rate futures, but the currency market is likely to react if the tone of Powell’s comments does not match these dovish expectations. Besides the Jackson Hole meeting over the weekend, a Group of Seven summit in France from Saturday could also rattle currencies. The European Union hopes to ease tensions with the United States to avoid punitive tariffs on EU autos. “The rates market is well ahead of the Fed in pricing in aggressive rate cuts, but Powell may not be as dovish as the market is pricing in,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. “Powell will keep the option of rate cuts on the table, but won’t lean too strongly in that direction. This would be supportive for the dollar.” The dollar ground higher to 106.59 yen on Friday but was stuck firmly in its recent trading range. For the week, the greenback was on course for a 0.2% gain versus the yen. The dollar index against a basket of six major currencies rose 0.2% to 98.344 and was headed for a second weekly gain. In onshore trading in China, the yuan fell to 7.0961 per dollar, its weakest since March 2008. Offshore, the yuan weakened to 7.0987. Concern about China’s economy is growing because U.S. tariffs on roughly $150 billion of Chinese goods will take effect from Sept. 1, about half the value of imports that President Donald Trump had previously threatened duties on. Trump has now set a Dec. 15 deadline for imposing tariffs on the remainder of Chinese goods imported by the United States.

SOUTH AFRICA OFFICE

 

South African Rand

EWN: The rand was flat on Thursday, as a boost from lower-than-expected local inflation was overshadowed by worries that further US Federal Reserve easing might take longer than expected. At 1547 GMT, the rand was 0.07% lower at 15.2050, after firming compared to its overnight close in New York in early trading, while stocks also closed lower. Stock markets slipped worldwide on Thursday following the release of minutes from the Fed’s July meeting, which revealed a rift between members over its 0.25% rate cut in July. With a large number reluctant to loosen policy, markets were seen to have gone too far in pricing in expectations of deeper cuts. Economists are also divided over whether easing inflation will push the South African Reserve Bank to cut rates again at its September meeting, following a 25 basis point reduction in July.


Headline consumer price inflation slowed to 4.0% year-on-year in July, according to data from Statistics South Africa showed on Wednesday, the lowest since January and below a consensus forecast of 4.2%. Lower inflation against relatively high interest rates marginally supports the rand’s carry yield attraction, but gains based on such data tend to be quickly overtaken by other factors such as high levels of local credit risk and diminishing chances of lower US benchmark rates. Stocks also declined. Johannesburg’s All-share index fell 0.82% to 54,188 points, while the Top-40 index fell 0.82% to 48,435 points. The yield on the benchmark 10-year government bond fell 0.5 basis points to 8.27%.

 

Global Markets

Reuters: Asian shares struggled to make any headway on Friday as weak U.S. manufacturing activity and uncertainty over how much further the Federal Reserve would cut rates added to the general air of caution in markets buffeted by global growth fears. With political tumult in Hong Kong, Italy and Britain adding to the tense backdrop, investors were keenly waiting on a speech by Fed Chairman Jerome Powell later in the day at a gathering of central bankers in Jackson Hole. MSCI’s broadest index of Asia-Pacific shares outside Japan edged 0.1% lower, though it was up 0.6% for the week and on track to break a four-week losing streak. Japan’s benchmark Nikkei added 0.2% and Australian stocks eased 0.1%, while South Korean shares shed 0.3% after Seoul said it will scrap an intelligence sharing agreement with Japan.


“It’s going to be another wait-and-see day for traders ahead of Powell’s Jackson Hole speech. Investors are hoping for some soothing words from him,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities. Wall Street stocks were mixed on Thursday, with the S&P 500 closing little changed, while the Dow was up 0.2% and the Nasdaq falling 0.4%. In the U.S. bond market, the closely watched two-year, 10-year Treasury yield curve briefly moved back into inversion overnight, a shift that also occurred last week and sent financial markets into a tailspin amid worries of a sharp global downturn. An inversions in the U.S. yield curve has presaged several past U.S. recessions, raising fears the decade-long expansion in the world’s biggest economy might be nearing its end. Overnight, there were more signs of easing momentum as a survey showed U.S. manufacturing activity contracted for the first time since September 2009, though better jobless claims data indicated a resilient labour market. All of that has made Powell’s speech in Jackson Hole pivotal for markets as they look for any clues on future policy easing, after the Fed last month cut rates for the first time since the financial crisis. Any indications of hawkishness in the Fed chief’s comments might hurt riskier assets, though the dollar stands to benefit. The greenback slipped on Thursday, but moved within narrow ranges. In early Asian trading, the dollar was up 0.1% against a basket of major currencies to 98.249. The euro also was little changed against U.S. currency at $1.1078. A survey showing a surprise uptick in euro zone business growth for August was offset somewhat by trade war fears knocking future expectations to their weakest in over six years. The New Zealand dollar rose 0.4% to $0.6390, its biggest daily gain since Aug. 8, and jumped 0.5% to 68.09 yen. Reserve Bank of New Zealand Governor Adrian Orr told Bloomberg TV he can afford to wait on monetary policy after stunning investors earlier this month with a sharp 50-basis-point rate cut. Oil prices weakened overnight, with both Brent crude and U.S. West Texas Intermediate down 0.6% each, on worries about the global economy. Brent crude was last up 0.2% at $60.02 per barrel and WTI crude added 0.1% to $55.38. Gold prices dipped on Thursday but held near the pivotal level of $1,500 per ounce, underpinned by continued demand for the precious metal amid uncertainties around monetary policy, trade and geopolitical tensions. Spot gold was last down 0.2% at $1,496.00 an ounce.

 

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