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Daily Brief - 11/10/2019

London Office

 

British Pound

 

Reuters: Sterling jumped on Thursday after the British and Irish prime ministers revived hopes of a possible Brexit deal. Boris Johnson and Leo Varadkar issued a joint statement saying they “could see a pathway to a possible deal” after a meeting which was seen by traders as a last-ditch attempt to revive talks over a possible deal over Britain’s withdrawal from the European Union, scheduled for Oct. 31. The pound jumped and then extended its rise all the way to $1.2394, up 1.4% on the day, after an Irish Times reporter said there had been very significant movement from the British side on customs - a key sticking point - in the talks. Versus a stronger euro, sterling rallied 1% to 88.90 pence. Short-dated British government bond yields also recorded their biggest one-day rise in five weeks. “Market hopes for a deal after all have been revived by these comments, following the rather negative comments that we saw in the last couple of days,” Commerzbank strategist Thu Lan Nguyen said, after Johnson and Varadkar’s statement.


“Overall I think the base case for the majority of market participants is that Brexit will be postponed,” she said, adding the market was not betting on a deal being reached by the end of the month, or the EU summit on Oct. 17-18. A flurry of British data earlier on Thursday, including gross domestic product and industrial production figures, had little impact on the pound, which has been driven primarily by politics as the scheduled Brexit date looms closer. Johnson has said Britain will leave the EU on Oct. 31, deal or no deal, but parliament has passed a law requiring him to request an extension if he fails to reach a divorce agreement. Any delay is expected to be followed by an early election. The pound held at a one-month low against a trade-weighted basket of currencies published by the Bank of England. The British currency has been driven by Brexit headlines again this week. It jumped on Wednesday after reports of a breakthrough on the vexed issue of avoiding customs checks on the Irish border and then gave up its gains as hopes of progress were dashed. Thursday’s economic data calmed fears that Britain is approaching a technical recession, defined as two successive quarters of negative growth. GDP in the three months to August was 0.3% higher than in the previous three-month period, beating all forecasts in a Reuters poll of economists. However, economic growth in August dropped by 0.1% on the month against economists’ average forecast for it to hold steady. “The risk of a no-deal Brexit every few months is weighing on both investment and consumer spending,” said Andrew Wishart, an economist at Capital Economics in a note. Bank of England Governor Mark Carney said UK growth was “very modest” and Thursday’s figures were consistent with a picture of soft underlying growth. Expectations for a BoE rate cut have risen in recent weeks, with markets fully pricing in a 25 basis point cut by May 2020.

 

US Dollar

 

Reuters: The dollar slid to two-week lows on Thursday, with safe-haven demand for the currency waning as investors grew optimistic about progress towards a U.S.-China trade deal and agreement on Britain’s exit from the European Union. Sterling jumped to a two-week high versus the dollar and posted its largest daily percentage gain in seven months on hopes of a Brexit resolution. The pound was last up 1.9% at $1.2447. “With a Brexit deal looking more likely and U.S.-China talks showing more progress, it’s just clear that the dollar is losing some safe-haven demand,” said Juan Perez, senior currency trader, at Tempus Inc in Washington. On Thursday, Irish Prime Minister Leo Varadkar said a Brexit deal could be clinched by the end of October to allow the United Kingdom to leave the European Union in an orderly fashion, after what he called a very positive meeting with Boris Johnson. Ireland is a major factor in the prolonged Brexit impasse.


“Once again, as the door for further discussions seemed to be closing, the glimmer of hope shone a little brighter,” said Tim Riddell, macro strategist, at Westpac in London. “Whether there is time to create the foundations for any form of agreement into next week’s EU Leader’s Summit so that it can be debated at UK Parliament’s special sitting on the 19th is still a distant hope,” he added. Investors also voiced hopes that Washington and Beijing could reach a trade agreement. Chinese Vice Premier Liu He on Thursday said China was willing to reach an agreement with the United States on matters both sides care about to prevent further escalation in tensions, the state news agency Xinhua reported. Liu, China’s top trade negotiator, made his comment in Washington when he met with U.S. officials as trade talks between the two countries started. In afternoon trading, the dollar index posted its biggest daily drop in five weeks. It last fell 0.4% to 98.70 .DXY, after earlier sliding to a two-week trough. The yen, another safe haven in times of geopolitical and financial stress, also fell to a one-week low against the dollar, weakening as well against riskier currencies such as the Australian dollar. The dollar was last up 0.4% against the Japanese yen at 107.89 yen. The euro rose to a two-week high and last changed hands at $1.1004, up 0.3%. The dollar was little moved after data showed U.S. consumer prices were unchanged in September, while underlying inflation slipped 0.1%. Market bets for a quarter-point U.S. rate cut at the U.S. Federal Reserve’s next policy meeting in October swelled to 85% from 53% a month earlier.

 

South African Rand

 

EWN: The rand firmed on Thursday, as the dollar retreated on global markets, with safe-haven demand for the US currency waning as investors grew optimistic about a trade deal between the United States and China. At 1530 GMT, the rand traded at R15.0650 versus the dollar, 0.72% stronger than its previous close. “USD/ZAR15.00 is a viable breaking point if the US-Sino trade negotiations prove meaningful yet should the discourse crumble, moves to the upside will be far more severe,” RMB analyst Nema Ramkhelawan-Bhana said in a note. The dollar index, a gauge of the greenback’s value against six major currencies, was on track for its biggest daily drop in five weeks. Chinese Vice Premier Liu He said on Thursday China is willing to reach an agreement with the United States on matters that both sides care about so as to prevent friction from leading to any further escalation.


Trade talks between the two countries started on Thursday. On the stock market, the Top-40 index closed 1.49% higher at 49,032 points while the broader all-share was up 1.33% to 55,060. Shares in cement company PPC Ltd jumped more than 6% to R3.80 after the firm said that Chief Financial Officer Tryphosa Ramano, who was also an executive director, will step down on 31 October. In fixed income, the yield on the benchmark government bond due in 2026 dipped 1.5 basis points to 8.225%.

 

Global Markets

 

Reuters: Asian shares and U.S. stock futures rose on Friday after U.S. President Donald Trump said he would meet with China’s top trade negotiator, while sterling retreated after rallying on revived hopes of a possible Brexit deal. Investors' renewed appetite for riskier assets weighed on the safe-haven yen and U.S. Treasury prices, while oil stayed firm on comments about possible supply cuts from the head of OPEC. In early Asian trade, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5%, following on from gains on Wall Street. S&P e-mini futures added 0.2%. Australian shares climbed 0.8%, while Japan's Nikkei stock index gained 0.9%. The more bullish market mood came after a first day of trade talks between top U.S. and Chinese negotiators that Trump characterised as “very, very good.” A White House official said the talks had gone “probably better than expected” and a U.S. Chamber of Commerce official briefed by both sides raised the possibility of a currency agreement this week.


“Freezing tariffs at current levels are unlikely to reverse the current trade driven slowdown in economic growth, and the uncertainty around unresolved structural issues such as IP theft and subsidies to state own enterprises are likely to remain deterrents for a pick-up in much needed capital expenditure,” analysts at National Australia Bank said in a morning note. “On this score details on a potential currency pact will be important,” they said. The dollar rose 0.1% against the yen to 108.07, while the euro was flat at $1.1004 and the pound was slightly lower, fetching $1.2432. The dollar index, which tracks the greenback against a basket of six major rivals, was down at 98.663 after posting its biggest daily drop in five weeks on waning safe-haven demand for the currency. The British pound jumped nearly 2% on Thursday, its biggest daily gain since March, after Irish Prime Minister Leo Varadkar said a Brexit deal could be clinched by the end of October after what he called a very positive meeting with his British counterpart, Boris Johnson. The move away from safe havens also lifted the yield on benchmark 10-year Treasury notes to 1.6716% compared with a U.S. close of 1.656% on Thursday. Yields rose across the curve, with two-year notes yielding 1.5464% compared with a U.S. close of 1.53%. In commodity markets, oil prices remained higher after the head of OPEC said the organisation could take action to balance oil markets, including a deeper cut in oil supplies. U.S. crude was up 0.43% to $53.78 a barrel and global benchmark Brent crude was up 0.46% at $59.37 per barrel. Rising risk appetite tarnished gold’s appeal, pushing spot gold down 0.16% to $1,491.65 per ounce.

Daily Brief - 11/10/2019

Hong Kong Office

 

Bristish Pound

 

FXStreet: GBP/USD into the 1.24 handle on Brexit hopes and signs of a breakthrough. Irish Taoiseach Varadkhar and UK PM Johnson, Varadkhar is now set to meet EU’s chief Brexit negotiator Barnier and other key EU stakeholders on Friday. GBP/USD rallied around 2% on Brexit breakthrough hopes and is currently trading t 1.2434 having travelled from a low of 1.2200 to a high of 1.2469, +1.86%. Irish PM Leo Varadkar says a Brexit deal is possible following a three hour meeting with UK PM Boris Johnson. There have been no specific updates on subject matter from the talks but the UK Minister Gove said that the meeting was cordial & constructive and both sides say ‘good progress' was made. 

 

"However, its quite some turnround after earlier comments from the EU. A press statement released says their discussions concentrated on the challenges of customs and consent but gave little away as to exactly what concessions had been made regarding Northern Ireland in order to get to this position. Varadkar says the talks were at a ‘very sensitive stage’ but were ‘very positive and promising’," analysts at ANZ Bank explained. 

 

Following these last-ditch talks between Irish Taoiseach Varadkhar and UK PM Johnson, Varadkhar is now set to meet EU’s chief Brexit negotiator Barnier and other key EU stakeholders on Friday and UK’s Brexit Secretary will also meet with Barnier and his negotiating team and GBP is higher as markets have the sense that they may have rekindled potential for compromise. 

 

However, as analysts at Westpac point out, "whether there is time to create the foundations for any form of agreement into next week’s (17th-18th) EU Leader’s Summit so that it can be debated at UK Parliament’s special sitting on 19th is still a distant hope." The analysts at Westpac explained that three options seem possible for tomorrow: Foundations for compromise towards forming a deal may be found. Agreement to call an end to negotiations until UK gains a clearer workable mandate (elections). Failure to progress and negotiations are ceased. Critical will be whether the cessation is acrimonious or not.

 

US Dollar

 

Reuters: Hopes of progress in U.S.-China trade talks and optimistic comments from Europe on Brexit pushed back the safe-haven yen and lifted the British pound and euro early on Friday. Sterling was the biggest mover overnight, jumping 2% to a two-week high versus the dollar and posting its largest daily percentage gain in seven months on hopes of a Brexit resolution.

 

Sterling last traded at $1.2431, having risen up to $1.2469 on Thursday. Against the euro, the pound also rose to two-week highs of 0.8831 pound to the euro on Thursday and last stood at 0.8858. The euro also gained against the dollar, rising to $1.1007. It had climbed as high as $1.1034 in U.S. trade on Thursday, its strongest in almost three weeks. That helped to send the dollar index to 98.709, a low last seen on Sept. 25. Also undermining the dollar, data showed on Thursday U.S. consumer prices were unchanged in September and underlying inflation retreated, supporting expectations the Federal Reserve will cut interest rates in October. The yen eased to 107.92 yen to the dollar, having shed about 0.45% the previous day.

 

Top U.S. and Chinese negotiators wrapped up a first day of trade talks in more than two months on Thursday, as business groups expressed optimism the two sides might be able to ease a trade war and delay a U.S. tariff hike scheduled for next week. U.S. President Donald Trump told reporters that his team had a “very, very good negotiation with China,” and reiterated his plans to meet with Liu at the White House on Friday. “Prospect of an interim deal were also boosted overnight following reports that President Trump was planning to meet Vice Premier Liu He on Friday,” Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney, said in a report. The Chinese yuan was also buoyed, with offshore yuan traded at 7.105 yuan per dollar, having hit a three-week high of 7.0990 to the dollar the previous day.

 

Japanese Yen

 

FXStreet: USD/JPY consolidates the overnight rally on bullish trade talk headlines. A Bloomberg and a NY Times story turned sentiment more positive overnight. USD/JPY is steady on Friday's Tokyo open, soaking up the last twenty-four hours of whipsaw price action in financial and commodity markets following conflicting trade talk headlines and weighing the positive outcomes. USD/JPY rose in a steady 1% climb from the lows of 106.93 to 108.02 overnight, despite the US Consumer Price Index (CPI) failing to impress. USD/JPY was, instead, supported by reduced safe-haven demand and rising US yields.

 

Meanwhile, from a technical point of view, Valeria Bednarik, the Chief Analyst at FXStreet, explained that the USD/JPY pair is trading just shy of the 108.00 figure, retaining its positive short-term stance according to intraday technical readings: In the 4 hours chart, the pair has stabilized above all of its moving averages, the first time in over a week. Technical indicators, meanwhile, hold near overbought reading and at intraday highs, having lost just part of their bullish momentum. The pair has been rejected twice from the 108.46 price zone during September, with a steeper recovery expected if the level breaks above it.

 

Global Markets

 

Reuters: Asian shares and U.S. stock futures rose on Friday after U.S. President Donald Trump said he would meet with China’s top trade negotiator, while sterling retreated after rallying on revived hopes of a possible Brexit deal. Investors' renewed appetite for riskier assets weighed on the safe-haven yen and U.S. Treasury prices, while oil stayed firm on comments about possible supply cuts from the head of OPEC. In early Asian trade, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5%, following on from gains on Wall Street futures added 0.2%. Australian shares climbed 0.8%, while Japan's Nikkei stock index gained 0.9%.

 

In commodity markets, oil prices remained higher after the head of OPEC said the organization could take action to balance oil markets, including a deeper cut in oil supplies. U.S. crude was up 0.43% to $53.78 a barrel and global benchmark Brent crude was up 0.46% at $59.37 per barrel. Rising risk appetite tarnished gold’s appeal, pushing spot gold down 0.16% to $1,491.65 per ounce.

 

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