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Daily Brief - 18/06/2019

London Office


British Pound


Reuters:Pound falls to five-and-a-half month low as Johnson's lead grows.The pound dived to a near six-month low against the dollar on Monday as concerns grew that arch-Brexiteer Boris Johnson will replace Theresa May as prime minister as he remains far ahead of his rivals in the race to lead their ruling Conservative Party. Johnson, the face of the official Brexit campaign in the 2016 referendum, has promised to lead the United Kingdom out of the EU with or without an agreement by Oct 31. He got a boost in his campaign on Monday when one of his former rivals and EU supporter Matt Hancock backed him saying he was almost certain to win the contest. “It looks like Boris Johnson is going to be the next prime minister unless there is a big surprise and that indicates a looming confrontation with the European Union,” said Lee Hardman, a FX strategist at MUFG in London. A median forecast for the chance of a disorderly Brexit rose to 25% in a June 11-14 Reuters poll, up from the 15% in May. 

On Monday, the pound weakened a third of a percent to $1.2554 against the dollar, its lowest level since a Jan. 3 flash crash. Versus the euro, the pound weakened to a five-month low of 89.43 pence. “Euro/sterling can trade to 92 (pence) and possibly to 95 (pence) this autumn as investors digest the trade-off between a no-deal Brexit and early elections,” ING strategists said. Latest positioning data also indicated that markets were getting cautious about the pound, with speculative bets against the British currency rising to a four-week high. The second round of voting in the Tory leadership contest is set for Tuesday, with the result due around 1700 GMT. Any candidate with 32 votes or fewer is eliminated. If all candidates have more than 32 votes, the one with the fewest is eliminated.


US Dollar


Reuters:The U.S. dollar was roughly unchanged on Monday, hovering near the two-week high set earlier in the session as investors reconsidered how dovish the Federal Reserve is likely to be at this week’s policy meeting. Broader currency markets were quiet, as traders hesitated to put on large positions before the Fed’s two-day meeting, a meeting of European Central Bank policymakers in Portugal and the Bank of England’s interest rate decision on Thursday. “It wouldn’t surprise us to see a bit of volatility going into these meeting but ultimately you’re going to see people taking more of a wait-and see approach,” said Charles Tomes, portfolio manager at Manulife Asset Management. Expectations of a rate cut at the Fed’s June 18-19 meeting have fallen to a probability of 20.8%, according to CME Group’s FedWatch tool. But bets for monetary easing at its July meeting remain elevated, with markets pricing in a 67.9% chance of a 25 basis point cut. Slow jobs growth in May, dovish comments from Federal Open Market Committee members and a slate of weak inflation data last week pushed rate-hike expectations up.

“It’s probably warranted that you need somewhat of a rate cut priced in. We think the pendulum has swung a little too far, too fast in the short term where the market has gotten ahead of itself pricing in cuts,” said Tomes. The dollar index hit a two-week high of 97.603 on Monday but was last flat on the day at 97.573. The euro was 0.07% higher at $1.122 as investors awaited policymakers speeches at the European Central Bank meeting in Sintra, Portugal, and Tuesday’s euro zone inflation data. Against the yen, the dollar was slightly stronger, last up 0.06% to 108.62. Sterling slid as low as $1.254, its weakest since January, heading for a 2019 low. Investors worry Boris Johnson, the front-runner to replace Prime Minister Theresa May, could put Britain on a path towards a no-deal Brexit. The Bank of England on Thursday will consider tightening monetary policy. Although BoE chief economist Andy Haldane has said the central bank is nearing a time for the UK to raise rates, no major changes should be expected until Brexit negotiations have finished, said Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets.


South African Rand


BDL: The JSE is set for a busy day of reporting on Tuesday, with Steinhoff, MultiChoice Group, Brait and Alexander Forbes expected to publish financial statements. Steinhoff, which is still reeling from an accounting scandal, is finally due to report results for the year to end-September 2018. In May, the retailer reported a net loss of €4bn for the year to end-September 2017, versus a loss of €279m in the previous 15-month period. Meanwhile, MultiChoice Group, which recently flew the Naspers coop, is due to report results for the year to end-March. The pay-TV operator has said core headline earnings per share in the year rose by 8% to 12%. Brait is also due to report numbers for the year to end-March. The group has warned that its reported net asset value per share was expected to fall by 23.4% to 27%. SA’s main bourse is likely to open mixed, in line with Asian stocks, ahead of a two-day Federal Reserve meeting that begins later on Tuesday, and after US President Donald Trump sent 1,000 troops to the Middle East amid tensions with Iran. Focus will also be on this weeks US Federal Reserve meeting, amid much market speculation as to the planned pace of interest rate cuts in the world’s largest economy.

Interest-rate cuts by the Fed will boost emerging-market currencies, although analysts warn domestic political risks and the US-China trade war continues to threaten sentiment, and therefore the outlook for emerging market currencies. Although the rand was still likely to be in a range between R14/$ and R14.50/$ by the end of 2019, the outlook has shifted towards a weakening of the currency, said Nedbank Corporate & Investment Banking analyst Walter de Wet. Signs of intent to interfere politically with the Reserve Bank and SA’s economic growth situation was weighing on the rand, although the former issue was likely to just be political noise, De Wet said in a note. Local focus is shifting to next week’s consumer inflation data on Wednesday, as well as the forthcoming state of the nation address (Sona) on Thursday, said Peregrine Treasury Solutions corporate treasury analyst Bianca Botes in a note. “With severe fluctuations in the local unit, short-term strength should be used as a buying opportunity as biases still lean towards a weaker rand by the end of 2019,” she said. International focus remains on developments in the US-China trade war, with it still uncertain whether President Donald Trump and Chinese President Xi Jinping will meet later this month.


Global Markets


Reuters:A gauge of global stock markets edged higher on Monday to build on monthly gains and benchmark government bond yields hovered near multi-year lows as investors girded for developments later in the week from central banks in the United States and elsewhere. The dollar slipped against a basket of currencies after touching its highest point since the start of June. MSCI’s gauge of stocks across the globe gained 0.05%, as increases for Wall Street’s main indexes led by the tech-heavy Nasdaq countered some weakness in Europe. The U.S. Federal Reserve is set to give its policy statement on Wednesday with expectations running high the central bank is poised to cut interest rates this year. The European Central Bank is also holding a forum in Portugal this week, with the Bank of Japan also set to hold its policy meeting later in the week. “With so much coming later this week as far as central bank announcements, I think investors are basically in a holding pattern,” said Chris Gaffney, president of world markets at TIAA Bank. The Fed is expected to leave borrowing costs unchanged at a policy meeting this week but possibly lay the groundwork for a rate cut later this year, with concerns about the global economy fueled by a heightening U.S.-China trade war

The Fed is expected to leave borrowing costs unchanged at a policy meeting this week but possibly lay the groundwork for a rate cut later this year, with concerns about the global economy fueled by a heightening U.S.-China trade war. “I think expectations have been set of a rate cut have been overdone so it will be interesting to see just how dovish the tone is,” Gaffney said. The New York Federal Reserve said its gauge of business growth in New York state posted a record fall this month to its weakest level in more than 2-1/2 years, suggesting an abrupt contraction in regional activity. On Wall Street, the Dow Jones Industrial Average rose 55.99 points, or 0.21%, to 26,145.6, the S&P 500 gained 6.95 points, or 0.24%, to 2,893.93 and the Nasdaq Composite added 62.31 points, or 0.8%, to 7,858.97. The pan-European STOXX 600 index lost 0.09%. Shares of Lufthansa plunged 12% after the German airline lowered its profit outlook for the full year 2019 citing intense competition from low-cost rivals. U.S. Treasury yields slipped in choppy trading, weighed down by softer-than-expected U.S. economic data and persistent pressure arising from the trade conflict with China.Benchmark 10-year notes last rose 2/32 in price to yield 2.0872%, from 2.094% late on Friday. Germany’s 10-year bund yield, the benchmark for Europe, was around -0.24%.

Daily Brief - 18/06/2019

Hong Kong Office


British Pound


Reuters: The British pound on Tuesday languished near this year’s low on rising worries Boris Johnson, the front-runner to replace UK Prime Minister Theresa May, could put Britain on a path towards a dreaded no-deal Brexit. Worries about Brexit hit the British pound, which tumbled to a 5-1/2-month low of $1.2532 on Monday and last traded at $1.2539. Sterling also fell to its weakest level since January against the euro, which climbed to 89.50 pence, compared to a two-year low of 84.56 touched just over a month ago.


Former foreign minister Boris Johnson got a boost on Monday in his campaign to succeed May as one of his former rivals and EU supporter Matt Hancock backed him. That rattled markets as Johnson, the face of the official campaign to leave the European Union in the 2016 referendum, has promised to lead the United Kingdom out of the EU with or without a deal.


The pound could be in for a rough ride in coming days, with a raft of potentially market-moving events ahead, including consumer inflation and retail sales data, due on Wednesday and Thursday respectively, and the Bank of England’s policy announcement on Thursday.


Australian Dollar


FXStreet: AUD/USD is currently trading at 0.6853, within a tight and early Asia range of between 0.6849/55 ahead of the RBA minutes today. Meanwhile, price action was rather dull overnight as well as we await direction from the Federal Open Market Committee (FOMC) which meeting starts today and concludes on Asian Thursday.  "While no change to interest rates is expected, we expect an acknowledgement of the deterioration in the international environment and downside risks for growth," analysts at ANZ Bank explained. 


Meanwhile, the RBA Minutes are going to be a key event for the Asian session. "The Governor’s speech on the eve of his first policy easing, earlier this month, has diminished the importance of the RBA’s minutes (due today)," the analysts at ANZ Bank explained, adding, "Usually, we would look to them for a more detailed assessment of the decision that was made, but with the Governor having already laid out the boards assessment, the minutes will likely provide little more than some additional information on the RBA’s view on recent trend in the labour market."


AUD/USD reached a 78.6% retracement level at 0.6857 and now consolidates. Analysts at Commerzbank explained that there are two 13 counts on the 240 minute chart and they will now exit remaining short positions and reattempt longs: "Initial upside target is the 55-day ma at 0.7008, 0.7022 the June peak and the April peak at 0.7069. Further up resistance can be spotted at the 0.7207 February high. A rise above the 0.7207 late February high would target the December 2018 high at 0.7394."


Japanese Yen


FXStreet: USD/JPY has started out in Tokyo within a tight range between 108.50 and 108.58, currently at 108.51. Overnight, the pair was also trading in a tight range, despite a drop in US yields. US 10yr treasury yields fell from 2.11% to 2.08%, partly in response to the US data, while 2yr yields mostly ranged sideways between 1.85% and 1.88%, awaiting the Fed meeting on Wednesday. 


Looking ahead, the FOMC is coming up, as well as the BoJ. The main focus will stay with the Fed and while markets are pricing little chance of a cut this week, there is a 90% chance of a Fed fund rate cut by the July meeting, and this meeting around is expected to be uber-dovish. The dots will make up the market's mind as to how many cuts are likely to follow later in the year. Currently, markets are pricing in a total of three cuts priced by December.


Valeria Bednarik, Chief Analyst at FXStreet explained that from a technical point of view, the pair continues in consolidative mode, hovering around the 38.2% retracement of the 109.92/107.81 slide, unable to settle above the level: "In the 4 hours chart, technical readings offer a neutral stance, with the price trapped between moving averages, holding above a flat 20 SMA but below a bearish 100 SMA. Technical indicators in the mentioned chart hold right above their mid-lines, lacking directional strength."


Global Markets


Reuters: Investor caution ahead of the Federal Reserve’s interest rate meeting capped Asian stocks on Tuesday, while crude oil prices retreated as global growth worries overshadowed supply concerns stemming from recent Middle East tensions. MSCI’s broadest index of Asia-Pacific shares outside Japan inched up 0.05%. Australian stocks added 0.1% while Japan’s Nikkei dipped 0.05%.


U.S. crude oil futures shed 0.08% to $51.89 per barrel after retreating 1.1% the previous day. Oil prices had slipped on Monday as weak Chinese economic data released at the end of last week led to fears of lower global demand for the commodity. Concerns over weakening demand overshadowed tensions in the Middle East, which remained high following last week’s attacks on two oil tankers in the Gulf of Oman.


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