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Daily Brief - 18/06/2018

London Office

 

British Pound

 

Reuters: Sterling held near seven-month lows on Friday as strong U.S. data and a hawkish Federal Reserve prompted investors to buy the greenback, while the Bank of England is expected to strike a cautious note at a review next week after some weak data. The pound edged up to $1.3290, still near to seven-month lows of $1.3205 touched late last month. Against the euro, sterling dropped 0.2 percent to 87.43 pence but remained above the 88-pence range it had traded at before the euro’s selloff on Thursday. Focus shifts to the Bank of England’s meeting next week and Prime Minister Theresa May’s ongoing efforts to convince her colleagues about her plans for Brexit.

 

May saw off a parliamentary rebellion this week over parliament’s role in the Brexit process and ensured her government’s all-important EU withdrawal bill passed. But her Conservative Party remains divided over how much of a say parliament should have on the final terms of a deal with the EU. That deal, which Britain and the EU need to agree before Britain’s exit in March, will define their future relationship. “Our base case for Brexit remains a ‘decent Brexit’ where the UK leaves the single market and most likely also the customs union but strikes a free-trade deal agreement ... We expect a lot of noise ahead of the important EU summits later in June and in October,” Danske Bank said in a note. Markets expect the BoE to keep rates on hold next week, but will be looking for any signs that the central bank is more comfortable with how the economy is performing after a difficult first quarter.

 

US Dollar

 

Reuters: The dollar edged up towards a seven-month high on Monday as investors bet the United States and China would avoid a full-blown trade war, although tensions between the two slowed its gains. The dollar index versus a basket of six major currencies crept up 0.1 percent to 94.862. The index was close to 95.131, a peak scaled on Friday, thanks to the dollar soaring more than 1 percent last week after the U.S. Federal Reserve gave a hawkish signal on interest rates while the European Central Bank struck a dovish tone. On top of last week’s Fed, ECB and the Bank of Japan policy meetings, the currency markets also weighed a U.S.-North Korea summit and the renewed trade tensions between the world’s two biggest economies.

 

The greenback navigated through those events, last of which was a decision by the United States on Friday to enact tariffs on $50 billion in Chinese goods. Soon afterward, China’s official Xinhua news agency said Beijing would impose 25 percent tariffs on 659 U.S. products, ranging from soybeans and autos to seafood. “The reaction by currencies to the trade developments has been mostly limited as the U.S. measure and China’s response were in line with expectations,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo. “A further escalation of U.S.-China trade tensions is of course a risk scenario. But the current tariffs, even if implemented, will hardly dent the global economy and the market also has to ponder about a scenario in which the two countries try to defuse tensions.” The dollar was down 0.2 percent at 110.44 yen, weighed down as risk appetites cooled on the back of falling Tokyo shares. The Nikkei fell on Monday with sentiment hurt by a combination of trade concerns and a strong earthquake that hit the western Japanese city of Osaka. Even when natural disasters and regional tensions hit close to home, the yen is often viewed as a safe haven currency, partly because of the resilience provided by Japan’s current account surplus.

 

South African Rand

 

BD Live: The rand staged a slight comeback on Friday morning, taking its cue from the overseas markets. The euro fared better against the dollar in early trade, with markets appearing to have absorbed the implications of the European Central Bank’s (ECB) surprise pledge on Thursday to keep interest rates lower for the next 18 months. The euro initially took a big knock on the announcement by the ECB, which also disclosed that its unconventional monetary policy stimulus, known as quantitative easing, would be phased out in December. "The kicker to the statement was that interest rates [would not change] for at least 18 months, which makes the US the shining light in the world economy as they have decent growth while in an interest-rate hiking cycle," TreasuryOne currency dealer Andre Botha said. The slightly better euro played out positively for the rand, though not enough to shake the latter’s losses for the week.

 

The rand has been at the mercy of unforgiving global developments over the past three months, though local developments have also added a negative tone. Power utility Eskom’s decision to implement power cuts conspired to push the rand to lows of R13.48/$ on Thursday, its lowest point since mid-December, before bouncing back slightly. "The threat of power outages is worrying at the time when we are battling to find bright spots in the economic data," said Halen Botha, market analyst at ETM Analytics. Eskom started load shedding for the first time in years on Thursday night due to constraints to supply as a result of industrial action. The weaker rand fuels inflation, though it gives exporters a competitive edge. Local bonds were weaker in early trade, with the yield on the benchmark R186 fetching 8.98% from its last settlement of 8.93%. At 10.39am, the rand was at R13.3986 to the dollar from R13.4592, R15.5289 to the euro from R15.5656 and R17.7743 to the pound from R17.8535. The euro was at $1.1590 from $1.11570.

 

Commodity Currencies

 

Reuters: Commodity-linked currencies sagged on the back of sliding crude oil prices. The Canadian dollar traded at C$1.3184 per dollar after retreating to a one-year low of C$1.3210 on Friday. The Australian dollar was little changed at $0.7442 after plumbing a five-week low of $0.7426 and the New Zealand dollar lost 0.25 percent to $0.6928.

 

Brent crude futures fell to a six-week low of $72.45 a barrel on Monday in the wake of reports that top suppliers Saudi Arabia and Russia would likely increase production at the June 22 OPEC meeting in Vienna. The OPEC meeting “will be one of this week’s key events due to the way oil prices shape economic and price views and thus impact yields and currencies,” said Koji Fukaya, president at FPG Securities in Tokyo.

Daily Brief - 15/06/2018

Hong Kong Office

 

Euro

 

Reuters:The euro was headed on Friday for its worst weekly loss in 19 months after a cautious European Central Bank signaled it will keep interest rates at record lows well into next year. Following a closely-watched meeting on Thursday, the ECB said it will end its massive bond purchase scheme by the end of this year, taking its biggest step yet toward dismantling crisis-era stimulus. 


The euro briefly spiked to a one-month high of $1.1853 following the announcement. But euro bulls were soon in retreat as the ECB also indicated that it would keep interest rates steady at least through the summer of 2019, reflecting the uncertainties hanging over the euro zone economy. The single currency slumped nearly 1.9 percent on Thursday, its largest one-day fall since Britain’s Brexit vote shock of June 2016. 


It stretched overnight losses to brush $1.1560, lowest since May 30. The currency was down 1.7 percent on the week, its worst weekly loss since November 2016. “The euro showed such a big reaction to the ECB meeting as its stance came in sharp contrast to the Federal Reserve, which had struck a hawkish tone just the day before,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo. The euro was a shade lower at 127.900 yen after dropping 1.7 percent overnight. 

 

US Dollar

 

Reuters:The U.S. dollar rose more than a penny against a basket of major currencies as the euro cratered, and U.S. stocks closed higher on Thursday, as the European Central Bank signaled interest rate hikes were a long way off. The bank’s unexpectedly dovish decision overshadowed its statement that it aimed to wrap up its crisis-era stimulus program at the end of this year. 


The U.S. Federal Reserve on Wednesday decided to raise rates by a quarter of a percentage point, creating “a widening rate differential between the U.S. and Europe, and the dollar is the beneficiary,” said Ed Egilinsky, head of alternative investments at Direxion in New York. The euro marked its steepest one-day drop against the U.S. dollar since June 2016, and was down 1.75 percent at $1.1583. The dollar index, which measures the greenback against six other top currencies, rose 1.17 percent. 


In U.S. Treasuries, benchmark 10-year notes last rose 12/32 in price to yield 2.9351 percent, from 2.979 percent late on Wednesday. The 30-year bond last rose 30/32 in price to yield 3.0545 percent, from 3.102 percent on Wednesday. 

 

Japanese Yen

 

FXStreet: USD/JPY is giving back some ground in Tokyo, so far not by much, 110.66 to 110.51 having been consolidated here between 110.69/51 for the best part of the US session post the ECB fireworks. The ECB put a serious spanner in the works of the bull's case for an initial test at the 38.2% Fibonacci retracement at 1.1855 where bulls anticipated a more hawkish outcome. Instead, the ECB delivered dovish forward guidance that sent the euro off a cliff, for the worst performance vs the greenback for two years. 


Looking ahead, the BoJ is up but it has already made it clear; no change should be expected while inflation remains off target; Analysts at Westpac expect the BoJ to be keeping the 10 year bond yield around 0%, a -0.1% deposit rate on banks’ excess balances held at the BoJ and, less justifiably, claiming to purchase JGBs at an annual pace of JPY80 trillion.


Valeria Bednarik, chief analyst at FXStreet explained that in the 4 hours chart, the pair briefly broke below the key Fibonacci support at 110.15 but holds above it: Technical indicators regained the upside, heading into the Asian session with upward slopes but well below their previous weekly highs. Moving averages in the mentioned chart remain well below the current level and with no clear directional strength. Mild-bullish, the pair needs to surpass its weekly high of 110.84 to complete a 100% retracement to May's high of 111.39.

 

Global Markets

 

Reuters: Asian shares wobbled on Friday as investors braced for U.S. tariffs against China, while the euro flirted with two-week lows after a cautious European Central Bank indicated it would not raise interest rates for some time. 


U.S. President Donald Trump has made up his mind to impose “pretty significant” tariffs and will unveil a list targeting $50 billion of Chinese goods on Friday, an administration official said. Beijing has warned that it was ready to respond. While it is not clear when Trump will activate the measures, rising Sino-U.S. trade tensions will put additional pressure on China’s economy, which is starting to show signs of cooling under the weight of a multi-year crackdown on riskier lending.


The Asia Pacific MSCI index edged down 0.2 percent, with most regional markets shrugging off a strong close on Wall Street. But Japan’s Nikkei average added 0.5 percent. The common currency shed 1.9 percent after the rate comments in its sharpest daily fall in almost two years. In early Asian trade on Friday, it eased 0.1 percent lower to $1.15595, its lowest level since May 30. Oil markets edged up, despite the strengthening dollar and fears that OPEC countries could decide to increase output at a meeting next week. 

 

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