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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.

28 / 10 / 21

British Pound

Reuters: Sterling recovered from intraday lows on Wednesday after British finance minister Rishi Sunak announced stronger economic growth and lower public borrowing forecasts. Announcing forecasts drawn up by the Office for Budgetary Responsibility (OBR), Sunak said in his budget statement that the economy was likely to grow by 6.5% in 2021, faster than a forecast of 4.0% made in March when Britain was still in a coronavirus lockdown. The 6.5% forecast was close to the International Monetary Fund’s estimate that British gross domestic product will grow by 6.8% in 2021, the fastest among Group of Seven nations after the country suffered the biggest slump in the G7 in 2020.


Against the U.S. dollar, the pound recovered from a 1-1/2 week low hit in early London trading to trade down 0.1% on the day at $1.3750. It had slipped as much as 0.4% earlier. The OBR cut its forecasts for borrowing in each of the subsequent four financial years. “The fiscal deceleration could weigh on sterling from here, and expectations of a Bank of England rate hike at next Thursday’s Bank of England meeting have pulled back a tad further,” said John Hardy, head of FX strategy at Saxo Bank. Markets are now assigning a 62% probability of a rate increase next week compared to 71% last week, CME data shows.


Bank of England interest rate-setter Silvana Tenreyro said she needed more time to judge how the end of the government’s job-saving furlough scheme affected the labour market, adding to signs that she sees no urgency to raise rates. But the pound remain trapped in narrow ranges on headlines of EU-UK wrangling over post-Brexit trade. Britain said on Monday the European Union’s proposals to solve the problem of trade involving Northern Ireland did not go far enough, and significant gaps remained between the two sides. Against the euro, the British pound weakened 0.3% at 84.57 pence.

 

US Dollar

Reuters: Major currencies steadied again late on Wednesday after surprising statements from the Bank of Canada provided a burst of volatility in what have been a relatively calm markets. The moves left the U.S. dollar index down 0.1% to 93.8240 after the dollar weakened against the Canadian dollar, euro and Japanese yen. The greenback initially lost 0.7% to the Canadian dollar after the Bank of Canada signaled that it could hike interest rates sooner than it had thought. But the move eased and left the U.S. dollar down 0.4% against the loonie.


Before the announcement, which was viewed by some as surprisingly hawkish, the Canadian dollar had weakened to its lowest level in nearly two weeks against its U.S. counterpart. “You’re going to see more FX volatility and swings here,” said Ed Moya, senior market analyst at broker OANDA. Traders will have different expectations for inflation in each region, Moya said, adding: “Interest rate differentials are going to be really hard to calculate for some currencies.” The Bank of Canada comments could be the first trigger for new assessments of how interest rates will change and impact currencies as central bankers try to support the pandemic recovery without unleashing sustained inflation.


Currency markets had moved little in the first two days of this week as traders paused for monetary policy announcements from major central banks around the world, including the U.S. Federal Reserve, which meets next week. For much of the day, the euro traded within 0.2% of its Tuesday close against the dollar. It was last up about 0.1% to $1.1607. The European Central Bank meets on Thursday and is expected to take a dovish stance. The German government cut its 2021 growth forecast for this year, as supply bottlenecks for semiconductors and rising energy costs delay recovery in Europe’s largest economy. Germany’s 10-year bond yield fell to its lowest in more than a week and its yield curve flattened. Similarly, the U.S. yield curve flattened with the spread between yields on two- and 10-year Treasuries narrowing to fewer than 104 basis points, the least since August. The 10-year yield dipped below 1.53%. It had reached 1.70% last week.


Flattening yield curves in developed markets this week may reflect concern, analysts say, that central banks will err if they tighten policy too early in the face of higher inflation that proves temporary. The Australian dollar rose 0.3% to $0.752 after data showed that Australian core inflation sped to a six-year high in September, surprising the market. The data prompted a spike in short-term yields. The Reserve Bank of Australia meets on Tuesday of next week and market pricing is at odds with RBA policymakers’ insistence that there will be no rate hikes before 2024. Against Japan’s yen, the U.S. dollar was down 0.3% to 113.7950 - still within recent ranges and close to the four-year high of 114.695 the dollar touched against the yen one week ago. The Bank of Japan meets on Thursday and is widely expected to downgrade its economic assessment. Markets have been betting on no rate hike in the foreseeable future. The British pound was down 0.1% to $1.3740 after the U.K. finance minister unveiled Britain’s budget forecasts. 


In cryptocurrencies, bitcoin fell to as low as $58,100 - its lowest in a week and a half - in a move attributed to profit-taking following the all-time high of $67,016 it reached last week. Since that high, the cryptocurrency has fallen more than 13% but was on track for its best month since February. Bitcoin was down 3% for the day at %58,634.

 

South African Rand

Reuters: South Africa's rand slipped in early trade on Wednesday, hit by subdued prices of precious metals, which are among the country's major exports. At 0720 GMT, the rand traded at 14.8850 against the dollar, around 0.3% weaker than its previous close. Gold fell 0.4% as firmer U.S. bond yields dented bullion's appeal, while platinum dropped 0.7%. "So much of the rand's recent resilience is a direct or indirect function of high commodity prices propping South Africa's terms of trade, meaning the currency often moves in lockstep with them," ETM Analytics said in a note.


The dollar was down 0.1% against a basket of currencies. Some analysts expect the dollar to weaken when tapering happens, after the U.S. currency hit a one-year high earlier this month on expectations that the Federal Reserve would start to taper its bond purchases. The focus later in the week will be on a series of domestic data releases, including producer inflation numbers on Thursday, as well as budget and trade numbers on Friday. Next week, attention will turn to a municipal election on Monday, which will gauge voter support for the governing African National Congress.


On the Johannesburg Stock Exchange, the Top-40 index was down 0.4% in early trade. The government's 2030 bond was slightly stronger, with the yield falling three basis points to 9.48%.

 

Global Markets

Reuters: Global stocks eased from record peaks as corporate earnings reports served as a stark reminder of current supply chain challenges, while investors also looked to upcoming central bank meetings to gauge whether policy tightening could come earlier. MSCI’s gauge of world stocks, ACWI, dipped 0.05% in Asia, with Japan’s Nikkei leading losses with a fall of 0.9%. Mainland Chinese shares slipped 0.3%, while MSCI’s broadest index of Asia-Pacific shares outside Japan ticked down 0.25%.


European stocks are expected to open flat, with Euro Stoxx futures and Britain’s FTSE futures little changed on the day. Overnight on Wall Street, the S&P 500 lost 0.51% from an all-time high of 4,574.79 hit on Tuesday, while the Nasdaq closed the session little changed, thanks to strong earnings from Microsoft and Google parent Alphabet. But other earnings reports showed the largest U.S. manufacturers including General Motors, General Electric, 3M and Boeing are facing logistics headaches and higher costs due to global supply bottlenecks that are likely to persist into next year. GM lost 5.4% following their earnings release on Wednesday.


In Asia, Japan’s robot maker Fanuc tumbled 7.8% while IT conglomerate Fujitsu shed 8.4% as their earning showed a bigger than expected impact from a global chips shortages. South Korea’s tech giant Samsung Electronics rose 3% after bumper profits but said it expects component shortages to affect chip demand from some customers in the final three months of the year. “The working assumption in the market has been that the impact of a chip shortage will fade by the end of year. But if it remains a problem next year, investors will surely feel less confident about the outlook,” said Masayuki Murata, general manager of balanced portfolio investment at Sumitomo Life Insurance.


With global supply disruption fuelling worries about inflation, investors are keeping close eye on whether major central banks will look to reduce their generous pandemic stimulus measures more quickly. The Bank of Canada ended its quantitative easing sooner than expected and signalled on Wednesday that it could hike interest rates earlier than previously thought, as soon as April 2022. The Reserve Bank of Australia skipped a chance to buy a government bond that is the linchpin of its yield curve control policy, sending yields soaring above target. The yield on the country’s April 2024 bond jumped above 0.5%, well above the policy target of 0.1%, with interest rate futures pricing in a rate hike as soon as May. Investors also suspect the U.S. Federal Reserve could move faster towards rate hikes, with Fed funds rate futures pricing in two rate hikes by end-2022. The Fed is expected to announce tapering of its bond purchase at its policy meeting next week.


The two-year U.S. Treasuries yield rose as high as 0.534%. At the start of October, it was around 0.26%. In contrast, longer-dated yields fell in part because a tighter monetary policy is likely to tame inflation and could derail the economic recovery down the road. The 10-year U.S. notes yields dropped to 1.554%, compared with a five-month peak of 1.705% touched a week ago. “Long-dated yields are falling because of concerns that tighter monetary policies will restrain the economy in the longer run,” said Naokazu Koshimizu, senior rates strategist at Nomura Securities.


Meanwhile, British government bond yields slid after the government cut its borrowing forecasts by more than expected. The 10-year Gilt yield fell 12.8 basis points on Wednesday, its biggest decline since March 2020, to 0.982%. In foreign exchange markets, the Canadian dollar held firm at C$1.2362 per dollar following the BoC’s surprise move. The yen showed limited response to the Bank of Japan’s decision to keep its policy on hold and stood at 113.55 per dollar, up 0.2%. The euro was steady at $1.1600 ahead of the European Central Bank’s policy announcement later in the day.


Oil prices fell after official figures showed a surprise jump in U.S. inventories of crude. Brent fell 1.8% to $83.07 per barrel, off Monday’s seven-year high of $86.70. U.S. crude fetched $81.25 per barrel, down 1.7% and off a seven-year high of $85.41 hit on Monday.

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