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Daily Brief - 03/09/2020

London Office

 

British Pound

 

Reuters: Sterling fell against a rebounding U.S. dollar on Wednesday but steadied against the euro as Bank of England policymakers warned that Britain’s economy could suffer more damage than anticipated by the central bank last month. The BoE said in August it expected Britain’s economy to recover to its pre-COVID-19 size by the end of next year, but Bank of England Deputy Governor Dave Ramsden told lawmakers economic output would permanently be about 1.5 percentage points lower than it would have been without the pandemic and another interest-rate setter, Gertjan Vlieghe, warned of “a material risk” it could take several years for Britain’s economy to return to full capacity. BoE governor Andrew Bailey told the lawmakers in Wednesday’s closely watched online session that inflation might not be as weak as estimated by the BoE last month, citing evidence that many businesses had not passed on a value-added tax cut to customers. The speeches from five out of the nine Bank of England monetary policy committee members were being scrutinised by investors for fresh insight on negative interest rates and clues to sterling’s direction.


The BoE said last month negative rates are part of their monetary tool box but that it saw no immediate case to cut interests rates below zero. Britain’s central bank has taken rates to record lows and ramped up bond purchases this year to support an economy hit by the coronavirus and the exit from the European Union. The speeches “are likely to keep the debate on negative policy rates alive in the UK”, said Adam Cole, chief currency analyst at RBC. Sterling fell 0.6% against the dollar to $1.3301, having risen to an eight-month high above $1.34 the day prior. The pound was flat against the euro at 88.97 pence, having risen earlier in the day to a three-month high of 88.74 pence. “I wonder if yesterday’s GBP/USD move finally flushed out the last GBP shorts,” said Kit Juckes, macro strategist at Societe Generale. Latest CFTC data showed that the leveraged funds held a very small amount of sterling short positions in the week ending Aug. 25. Fresh data which will include Monday and Tuesday this week will be released on Friday. Trade-weighted sterling meanwhile remained range-bound, and well below its pre-Brexit referendum level. The fact that the real effective exchange rate in sterling is much lower than that in sterling/dollar indicates the recent sterling strength came solely on external factors. “Sterling remains very weak in real effective terms which means it can only go down with the help of big short positions,” Juckes said.

 

US Dollar

 

Reuters: The dollar’s bounce extended on Thursday, as investors trimmed bets against the greenback and sold the euro on concerns that the European Central Bank was worried about its rise. The bounce has lifted the greenback about 1.3% above the 28-month low it hit against a basket of currencies on Tuesday. Few analysts expect it to hold for too long, but it gained broadly in Asia and if sustained would be the first time the dollar has climbed three sessions in a row since May. “You could put (the dollar bounce) down to a bit of a trend reversal, it’s had a long run downwards,” said BNZ senior markets strategist Jason Wong. “But if it is a floor, it’s only a short-term one...everyone’s pretty bearish dollars for good reason,” he said, pointing to the Federal Reserve’s policy outlook that will likely keep rates very low for a long time. For about a fortnight now the dollar has been fighting to hold the line after dropping 10% from a March peak. As traders start to temper stretched bets on the euro it could post its best week on the common currency in four months. The euro fell about 0.4% to a one-week low of $1.1797 in Asia after the Financial Times reported that several members of the ECB's governing council were concerned that the euro's rise could weigh on European growth.


That followed remarks on Tuesday from ECB’s chief economist Philip Lane, who said the exchange “does matter” for monetary policy, which had begun the euro’s descent from above $1.20. A speech from ECB board member Isabel Schnabel at 1500 GMT will be closely watched for any comments on the currency. “For now, do not rule out further extension towards $1.18, but we are cautious of calling for further downside from that level,” said OCBC Bank currency strategist. It hit a three-month trough of 88.67 pence. The outlier was the yuan, which rose as far as 6.8250 per dollar in the onshore market in the wake of a survey showing a sustained recovery in China's services sector, which grew for a fourth straight month. The Chinese currency pared those gains in the afternoon, to hold steady against an otherwise rising dollar, but it has put on an eye-catching 4.3% gain over the past three months. That has investors beginning to think China’s policymakers are becoming more tolerant of a stronger currency as part of a broader shift away from export-driven growth. “Chinese leaders will be less tempted to use yuan depreciation to stimulate growth as the export sector plays a secondary role,” said Mizuho’s chief Asian FX strategist Ken Cheung. Elsewhere, the Japanese yen is gradually drifting back to where it was before Shinzo Abe resigned as Prime Minister as his close ally Yoshihide Suga firms as the favourite to succeed him. Suga formally declared his candidacy for the Liberal Democratic Party leadership on Wednesday and is expected to persist aggressive fiscal and monetary stimulus. The yen slipped marginally to 106.33 per dollar. The Australian dollar slipped 0.4% to $0.7307 and the kiwi was down 0.3% at $0.6759. Ahead on Thursday are purchasing managers index figures in Britain, Europe and the United States and markets are also awaiting U.S. jobs data at 1230 GMT. U.S. payrolls figures are due Friday, with soft private jobs data on Wednesday pointing to possible disappointment of economists’ expectations for 14 million new hires in August.

 

South African Rand

 

Reuters: A stronger dollar and domestic economic and political risk weighed on South Africa’s rand, which on Wednesday gave back some of the gains from the previous session. At 1500 GMT the rand was 1.41% weaker at 16.8825 per dollar, after approaching 16.5600 on Tuesday, its strongest in nearly a month, when a sharp slide in the greenback led to strength across emerging markets. But on Wednesday, data in the world’s No.1 economy showed a rise in manufacturing activity and eased concerns about the extent of the COVID-19-induced decline in global growth, which boosted the dollar. In South Africa, nationwide electricity blackouts by state firm Eskom for a second day rekindled concerns about the country’s ability to shake-off recession and a fiscal crisis. Ratings agency Moody’s said on Tuesday there was a “meaningful risk” of wider deficits in countries such as South Africa as governments were forced to bail out failing state firms.


Waning enthusiasm about President Cyril Ramaphosa’s stance on corruption following a face-off between opposing factions in the governing African National Congress (ANC) over the weekend also stalled the rand’s progress. “We see the dial flicking on dealing with corruption, but the bar has not yet been met,” Peter Attard Montalto of research firm Intellidex said. On a day of a positive momentum globally, the Johannesburg Stock Exchange (JSE) started the day higher, but pared most of the gains on the prospect of accelerated power cuts by Eskom. The strong dollar weighed on gold prices and pushed the South African gold miners’ index lower. The FTSE/JSE all share index was down 0.12% to end at 55,862 points while the top 40 companies index closed down 0.05% to 51,678 points. In fixed income, the yield on the benchmark instrument due in 2030 was down a basis point to 9.125%.

 

Global Markets

 

Reuters: Asian equities started strong on Thursday as a sustained recovery in China’s services sector and the prospect of additional U.S. stimulus whetted risk appetite, while the dollar pared gains. MSCI’s broadest index of Asia-Pacific shares outside of Japan climbed 0.5%, clocking its third straight session of gains to hover near a recent 2-1/2-year high. Australia’s S&P/ASX 200 rose 0.9% and Japan’s Nikkei added 1.3%. Hong Kong’s Hang Seng index was up 0.2% while China’s blue-chip index was 0.35% higher. E-mini futures for the S&P 500 were barely changed. A closely-watched survey showed China’s service sector activity grew for a fourth straight month in August, staying above the 50-mark, while companies hired more people for the first time since January. The services sector, which accounts for about 60% of the economy and half of urban jobs, had been slower to return to growth initially than large manufacturers, but the recovery has gathered pace in recent months as COVID-19 restrictions on public gatherings lifted. Analysts expect the equity markets rally to extend further as investors focus on the “easy money” dimension, though risks were growing. 


“I think we’re now at a point where tactically it makes sense to be more prudent than two or three months ago as there are still a number of significant risks for investors to contend with,” said Scott Berg, portfolio manager of T. Rowe Price’s global growth equity strategy. “The economic recovery remains fragile and there is still considerable uncertainty over the growth trajectory beyond the initial rebound phase,” Berg added. China-U.S. tensions and U.S. presidential elections were other major risks, with a Democrat victory likely seeing a “major switch in policy direction and a different regulatory and tax regime.” On Wall Street overnight, the three major equity indexes moved higher with gains led by defensive sectors such as utilities as the high-flying tech sector paused. “The equity market rally overnight (was) characterised by a rotation away from the tech titans that have led gains this year. That broadening of the equity rally is in itself a signal of confidence in a broader economic recovery,” said Steve Miller, investment strategist at GSFM. Data on Wednesday showed U.S. private employers hired fewer workers than expected for a second straight month in August, suggesting that the labour market recovery was slowing. A separate report showed factory orders rose more than expected in July, pointing to continued improvement in the manufacturing sector. In currencies, the dollar gave back some of the gains from earlier this week with its index against a basket of major currencies down 0.1%. The greenback was slightly higher on the safe haven Japanese yen at 106.25. The euro was off 0.02% to $1.1851. In commodities, U.S. crude added 15 cents to $41.66 while Brent gained 5 cents to $44.48 a barrel. Spot gold was slightly higher at $1,946.8 an ounce.

 

 

 

 

 

 

Daily Brief - 09/09/2020

Hong Kong Office

 

US Dollar

 

Reuters: The dollar held its gains on Wednesday, as a stockmarket slide spilled over into selling of riskier currencies and an oil slump weighed on commodity currencies, while fresh Brexit turmoil pushed the pound to a six-week low. The greenback sat by a one-month high against a basket of rivals and edged up against the pound, euro and the kiwi. In early trade the safe-haven Japanese yen rose to a one-week peak of 105.83 per dollar as investors looked to jittery equity markets to set the tone. 

 

The overnight currency moves came with gains in the bond market as a tech selloff, which began last week with no apparent trigger, begins to drive broader risk aversion. The risk-sensitive Antipodean currencies fell to two-week lows, before climbing back to flat as stock futures pared losses. The Australian dollar last stood at $0.7215 and the New Zealand dollar at $0.6618. 

 

A nearly 8% drop in U.S. crude prices has also weighed on oil exporters' currencies, with the Canadian dollar hitting a three-week low of C$1.3256 per dollar. The pound, which fell 1.5% against the dollar overnight, edged lower to a six-week trough of $1.2962 in Asia and has lost nearly 4% in a little over a week. The dollar has now lifted 1.4% from its early-September trough, making particular progress against the euro in the wake of comments from ECB chief economist Philip Lane, who said last week that the exchange rate mattered to monetary policy. The euro last traded at $1.1772.

 

Euro

 

FXStreet: EUR/USD has bounced up from the lower end of a daily chart expanding sideways channel. The pair is currently trading largely unchanged on the day near 1.1770, having defended the channel support at 1.1757 a few minutes before press time. 

 

If confirmed with a daily close under 1.1757, a channel breakdown would mean the rally from lows under 1.08 seen in May has ended, and the bears have regained control. That possibility cannot be ruled out as long as the 14-day relative strength index's downtrend line is intact. 

 

Key support levels to watch out for this week are the lower end of the channel at 1.1757 and the 50-day simple moving average located at 1.1677. Meanwhile, the 50-hour SMA at 1.1809 and the psychological level of 1.19 are crucial hurdles. 

 

Australian Dollar

 

FXStreet: AUD/USD rises to 0.7220, up 0.08% on a day, after China data on early Wednesday. The Aussie pair previously dropped to the two week low as risk aversion kept the throne. Also weighing on the quote was the broad US dollar strength. China’s August month Consumer Price Index (CPI) matched 2.4% YoY expectations while the Producers Price Index eased from -2.4% prior to -2.0% while proving the market consensus right. It should also be noted that Australia’s Home Loans surged 10.7% versus 3.1% forecast in July. Earlier during the day, Australia’s Westpac Consumer Confidence for September reversed the -9.5% previous reading with a +18% mark. 

 

While reacting to the data, AUD/USD extends consolidation from a two-week low after the releases. However, there are around nine drugmakers that recently stopped further trials unless finding the “safe” research results. Also on the negative side could be the on-going Sino-American tussle and uncertainty over the US stimulus bill, not to forget Brexit woes. US President Donald Trump promised to “stand tough on China”, if he is re-elected, whereas Republicans’ bid of $300 billion for the COVID-19 aid package that was termed “an insult to American people” by House Speaker Nancy Pelosi. 

 

Brexit talks are in limbo as the UK prepares to alter the Withdrawal Agreement and the European Union (EU) hates it. Not only an ascending trend line from June 30, at 0.7220 now, but an upward sloping resistance line from May 15, currently around 0.7255/60, also challenges the bulls. Meanwhile, 0.7135-34 support confluence including 50-day SMA and August 20 low remains in the spotlight.

 

Global Markets

 

Reuters: Asian stocks were set to come under pressure on Wednesday after Wall Street sank for the third consecutive day led by declines in heavyweight technology companies, and oil prices hit lows not seen since June. Escalating concerns over Britain leaving the European Union without a trade agreement added to the downdraft facing Asian markets. MSCI’s gauge of stocks across the globe shed 2.03% following declines in Europe. Australian S&P/ASX 200 futures lost 1.64% in early trading. Japan's Nikkei 225 futures fell 0.50%. Hong Kong's Hang Seng index futures lost 0.63%. 

 

On Wall Street, the Dow Jones Industrial Average fell 632.75 points, or 2.25%, to 27,500.56, the S&P 500 lost 95.14 points, or 2.78%, to 3,331.82 and the Nasdaq Composite dropped 465.44 points, or 4.11%, to 10,847.69. Among U.S. technology names, electric-car maker Tesla plunged 21.06% to suffer its biggest daily percentage drop after it was excluded from a group of companies being added to the S&P 500. The safe-haven U.S. dollar rose on Tuesday to a four-week high, led by gains versus sterling on renewed fears about Brexit and as investors’ appetite for risk fell with Wall Street’s sell-off.

 

The dollar index rose 0.527%. Oil futures sunk sharply lower on Tuesday, with Brent falling below $40 a barrel for the first time since June and U.S. crude declining nearly 8%, in part because of rising COVID-19 cases in some parts of the world. U.S. crude recently fell 0.95% to $36.41 per barrel and Brent was flat on the day. 

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