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Daily Brief - 31/03/2020

London Office


British Pound


Reuters: Sterling skidded against the dollar on Monday, as the U.S. currency reasserted its safe haven status and Britain’s economic outlook was knocked further by a credit ratings downgrade. Last week the pound rose nearly 7% against the greenback as measures to inject liquidity into markets by the U.S. Federal Reserve and a $2 trillion stimulus bill to offset the economic effects of the coronavirus pandemic cooled dollar demand. Ratings agency Fitch cut Britain’s sovereign debt rating on Friday, saying debt levels would jump as it ramped up spending to offset a near shutdown of the economy. Facing what some economists say could be Britain’s deepest recession in a century after the government ordered many businesses to close, finance minister Rishi Sunak announced a string of stimulus measures to try to curb unemployment. Central to Sunak’s plan is a commitment for the state to pay 80% of the wages of workers who are temporarily laid off.

One in five Britons fear an economic depression because of the impact of coronavirus and a further 52% expect the economy to be in recession within a year, a poll showed. The Bank of England, like other central banks, has also sprung into action, expanding its bond-buying programme by a record 200 billion pounds and cutting its main interest rate to a record low 0.1%. Fitch said the measures were necessary to cushion the economy but it now expected Britain’s public debt, as a share of gross domestic product, would rise to 94% in 2020 and 98% in 2021, from 84.5% in 2019. Doubts about Britain’s future trading ties with the European Union posed a further risk, Fitch said. The EU expects Britain to seek an extension of its post-Brexit transition period beyond the end of the year, diplomats and officials said on Monday, as negotiations on trade have ground to a halt due to the coronavirus pandemic. By 1600 GMT, the pound was down 0.4% at $1.2386, off its highest levels since March 13. Against the euro however, sterling extended last week’s gains, up 0.6% at 88.92 pence per euro and hitting its highest level since March 13. “The fundamentals suggest sterling is vulnerable,” said Jane Foley, currency strategist at Rabobank in London, noting Britain’s current account deficit, Brexit, and the worsening of Britain’s public finances. “One of the interesting parts of the Fitch downgrade was pointing not just to the worsening of public finances but also the Brexit element, pointing to concerns about the UK’s trade agreement with the EU.”


US Dollar


Reuters: The dollar rose against the yen on Tuesday as Japanese investors and companies rushed to cover a greenback shortage before their fiscal year end, but sentiment remained fragile as the global coronavirus crisis worsened. China’s yuan held steady even after a key survey showed manufacturing returned to growth in March, but investors remain skeptical of the uptick given many businesses are still struggling to resume operations from coronavirus disruptions. The pound fell against the dollar and the euro as a sovereign ratings downgrade continued to weigh on sterling, underlining the public finances strain from a much needed massive fiscal stimulus. Tuesday is the last trading data for Japan’s fiscal year and the end of the quarter for major investors elsewhere, which could lead to some volatile swings as big currency market players close their books. However, analysts warn that an almost certain global recession due to the coronavirus will remain a dominant influence in trading and eventually favor currencies least affected by the economic downturn.

“The talk is Japanese names are short of dollars, which is likely to keep the dollar bid well into London time,” said Yukio Ishizuki, FX strategist at Daiwa Securities in Tokyo. “We have to look beyond that and focus on what’s going on in China’s economy. Even if there is some decent data from China, I cannot be optimistic, because economic activity in many countries is grinding to a halt.” The dollar rose 0.45% to 108.31 yen on Tuesday. In the onshore market, the yuan was little changed at 7.0888 against the dollar. China’s official manufacturing Purchasing Manager’s Index unexpectedly showed activity swung to expansion in March, but traders tempered their optimism because China’s economy is still expected to suffer a steep economic contraction in the first quarter and other major economies are also taking a big hit. Only on Monday the People’s Bank of China unexpectedly cut its reverse repo rate by the most in almost five years to relieve pressure on the economy. The euro fell 0.22% to $1.1017. Traders are bracing for data expected to show a rise in German unemployment as the global economy reels from the coronavirus pandemic. Against the Swiss franc, the dollar edged up to 0.9603, following a 0.8% gain on Monday. Sterling fell 0.68% to $1.2334, and against the euro, the pound fell 0.5% to 89.30 pence. The pound remained under the gun after ratings agency Fitch cut Britain’s sovereign debt rating on Friday, saying debt levels would jump as it ramped up spending to offset a near shutdown of the economy. Traders are also awaiting the release of UK gross domestic product later on Tuesday. The New Zealand dollar dipped after the country's government extended a nationwide state of emergency for another seven days to slow the spread of the coronavirus, but the kiwi quickly regained its composure to trade steady at $0.6019. The Australian dollar held its ground at $0.6174. The antipodean currencies have come under heavy selling pressure over recent weeks as their close economic ties to China and the global commodities trade make them vulnerable to the coronavirus outbreak.


South African Rand


EWN: The rand plunged to an all-time low on Monday, falling below R18.00 to a dollar after ratings firm Moody’s cut the country’s last investment grade credit rating to “junk”, adding to mounting panic about the coronavirus outbreak. At 0913 GMT, the rand was 0.97% weaker at R17.8300 per dollar, pulling back from the all-time low of R18.0800 it crashed to in Asian trading. Late on Friday, Moody’s downgraded the rating one notch to Ba1 from Baa3 and maintained a negative outlook. S&P Global and Fitch downgraded Africa’s most industrialised economy to sub-investment grade in 2017. Moody’s downgrade will see South Africa kicked out of the benchmark World Government Bond Index (WGBI) of local-currency debt at the end of April, triggering up to $12 billion of forced selling, treasury and analysts estimate. “There is still some uncertainty around how much forced-selling of domestic bonds will materialise as a result of expulsion from the WGBI,” economists at ETM Analytics said, adding: “It is unlikely that all investors will head for the door at the same time.”

One factor likely to shield bonds and the rand from a deep and prolonged selloff is the relatively high rate of return, or yield, which is 4% to 5% higher than return offered by similarly rated peers and significantly above the near zero rates offered by developed market bonds. The central bank’s decision to a launch a “quantitative easing” style bond-buying programme, alongside easier repo terms for commercial banks, was also set to support demand for government bonds and limit a sharp spike in the curve. “For investors with a longer-term horizon, this presents an opportunity to lock in those higher yields. In the longer term, the bond market should perform well,” Maarten Ackerman, chief economist and advisory partner at Citadel, said. Bonds opened weaker, albeit in a more muted fashion than moves seen last week as country entered lockdown. The yield on the benchmark government bonds due in 2026 was up 12.5 basis points to 10.615%. Central bank governor Lesetja Kganyago said in a teleconference late on Sunday the aim of the bond-buying exercise was to normalise conditions in the bond market, and not to press down borrowing costs or directly plug government’s cash shortfall. On the same call, Finance Minister Tito Mboweni said the government was ready to approach the International Monetary Fund for emergency cash, but only to fund health interventions rather than stem widening fiscal deficits. 


Global Markets


Reuters: Asian shares were closing out a calamitous quarter with a tentative rally on Tuesday as factory data from China held out the hope of a rebound in activity, even as much of the rest of the world shut down. China’s official manufacturing purchasing managers’ index (PMI) bounced to 52.0 in March, up from a record-low 35.7 in February and topping forecasts of 45.0. Analysts cautioned the index could overstate the true improvement as it measures the net balance of firms reporting an expansion or contraction in activity. If a company merely resumed working after a forced stoppage, it would read as an expansion without saying much about the overall level of activity. The number was enough of a relief to help MSCI’s broadest index of Asia-Pacific shares outside Japan rise 1.1%. That still left it down 22% for the quarter, its worst performance since 2008. Gains were modest at best with Shanghai blue chips up 0.6% and South Korea up 1.7%. Japan's Nikkei eased 0.6%, to be down 20% since the start of the year.

E-Mini futures for the S&P 500 edged up 0.1%, supported by end of month book-keeping demand. EUROSTOXX 50 futures rose 0.7% and FTSE futures 0.3%. “It’s month-end rebalancing, whereby balanced funds now underweight equities versus fixed income given this month’s valuation destruction, need to buy stocks to get back into balance,” analysts at NAB said. Healthcare had led Wall Street higher, with the Dow ending Monday up 3.19%, while the S&P 500 gained 3.35% and the Nasdaq 3.62%. News on the coronavirus remained grim but radical stimulus steps by governments and central banks have at least provided some comfort to economies. Infections in hard-hit Italy slowed a little, but the government still extended its lockdown to mid-April. California reported a steep rise in people being hospitalized, while Washington state told people to stay at home. Trade ministers from the Group of 20 major economies agreed on Monday to keep their markets open and ensure the flow of vital medical supplies. Portfolio management also played a part in the forex market where many fund managers found themselves over-hedged on their U.S. equity holdings given the sharp fall in values seen this month, leading them to buy back dollars. That saw the euro ease back to $1.1020, from a top of $1.143 on Monday, while the dollar index bounced to 99.303, from a trough of 98.330. Month-end demand for dollars from Japanese funds saw the dollar inch up to 108.45 yen, though it remained some way from last week's peak at 111.71. Oil prices steadied, after diving to the lowest in almost 18 years on Monday as lockdowns for the virus squeezed demand even as Saudi Arabia and Russia vied to pump more product. U.S. crude added $1.13 to $21.22, while Brent crude futures gained 45 cents to $23.21 a barrel. In a new twist, U.S. President Donald Trump and Russian President Vladimir Putin agreed during a phone call on Monday to have their top energy officials meet to discuss slumping prices. “However, the reality is that the level damage to demand is likely to overwhelm any production cut agreement between major producers,” wrote analysts at ANZ in a note. “The lockdown of cities around the world and the shutdown of the aviation industry will cause a fall in demand the industry has never seen before.” In the gold market all the talk has been of a rush of demand for the physical product amid shortages in coins and small bars. Flows into gold-backed ETFs have ballooned by $13 billion so far this year, the most since 2004. The metal was holding at $1,615 an ounce, well up from a low of $1,450 touched early in the month.

Daily Brief - 01/04/2020

Hong Kong Office


British Pound


FXStreet: GBP/USD struggles to remain strong beyond 21-day SMA. 61.8% Fibonacci retracement, 200-day SMA guard immediate upside. 1.2130 holds the key to pair’s declines towards 1.2000 mark. GBP/USD remains mildly changes to 1.2420 during Wednesday’s Asian session. That said, the pair struggles to carry its strength beyond 21-day SMA while staying below 61.8% Fibonacci retracement of March month declines and 200-day SMA. Just ahead of the 61.8% Fibonacci retracement level of 1.2520, highs marked during late-March, around 1.2485/90, can act as the immediate resistance.


Further, a 200-day SMA level of 1.2665 and the early-March low near 1.2740 add to the upside barriers. Alternatively, sellers will seek entry below the confluence of 21-day SMA and 50% Fibonacci retracement, near 1.2315/10. In doing so, 1.2130 could be on their radars as it holds the gate for further weakness towards 1.2000.


US Dollar


Reuters: Chaotic scrambling for dollar cash in the wake of global market routs in mid-March has subsided for now, with quarter-end funding demand out of way. The U.S. dollar could come also under pressure, particularly against other liquid major currencies, under the weight of Federal Reserve measures designed to ensure sufficient liquidity in the global financial system, analysts said. Overnight the U.S. dollar gained against the both Aussie and the kiwi but weakened against the yen and ended almost flat against most European currencies.


“I do not expect the dollar to rise to the level we saw last month, given that the Fed has been pumping dollars,” said Minori Uchida, chief currency analyst at MUFG Bank. “Against the yen, dollar is likely to slip further. Given the current economic conditions, Japanese firms will refrain from foreign direct investment.” The U.S. Federal Reserve has been buying U.S. bonds at an unprecedented pace and has started programs to support credit markets, including commercial paper, corporate bonds and asset-backed securities. The Fed on Tuesday broadened the ability of dozens of foreign central banks to access U.S. dollars during the coronavirus crisis by allowing them to exchange their holdings of U.S. Treasury securities for overnight dollar loans. Given unusually high levels of uncertainty about the global economic outlook, investors are likely to prefer more liquid currencies, analysts say.


Japanese Yen


FXStreet: USD/JPY bleeding out and poised for further risk-off induced downside. 109.69 comes as an upside target which is required to ease the bearish threat. USD/JPY is trading around the 108 handle between a range of 107.46 and 108.72, currently positioned at 107.68 and flat on the session in the final hour of trade on Wall Street, pressured as US stocks head towards a losing close for the session. The S&P 500 is -1.55 into the final minutes of trade. 


Indeed, the yen is a favoured store of liquidity at times of such crisis, and with the US dollar a little loser, perhaps its time for a revisit to the downside on USD/JPY putting a recovery towards the Feb 20 high of 112.23 and 112.40, Apr 24th 2019 high back on ice? The scramble for dollars appears to have eased with the Fed's extraordinary measures helped to quench the market's thirst for dollars.The next support lies at 106.76, Mar 18 low and 106.45, 50.0% of the March 9-24 rally and a test with a close below of this area would set the scene for a deeper pullback.109.69 marks a key upside target which is required to ease the bearish threat.


Global Markets


Reuters: Asian shares faced another leg lower on Wednesday as the coronavirus sharply slows global growth, leading a gauge of world stocks to post its biggest quarterly decline in more than a decade and oil prices to trade near lows last seen in 2002.  Shares on Wall Street tumbled on Tuesday, with the Dow registering its biggest quarterly fall since 1987 and the S&P 500 its steepest quarterly drop since a decade ago on growing evidence of the massive downturn the pandemic will incur. E-Mini futures for the S&P 500 traded 1% lower in after-hours trade, while Asian futures suggested the rout would continue. FTSE China A50 futures in Singapore were down 0.85% and Japan’s Nikkei fell 1.86% in early trade.


The dollar slid against a basket of currencies, pressured by the latest Federal Reserve measures to ensure sufficient liquidity in the global financial system. The Fed is now allowing foreign central banks to exchange their holdings of U.S. Treasury securities for overnight dollar loans. The dollar index fell 0.275% while the Japanese yen strengthened 0.12% versus the greenback at 107.44 per dollar.


Crude oil benchmarks ended a volatile quarter with their biggest losses in history, with both U.S. and Brent futures hammered throughout March due to the pandemic and the eruption of the Saudi-Russia price war. Global fuel demand has been sharply cut by travel restrictions due to the coronavirus. Forecasters at major merchants and banks see demand slumping by 20% to 30% in April, and for weak consumption to linger for months.


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