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Daily Brief - 11/12/2019

London Office

 

British Pound

 

Reuters: The British pound slipped early on Wednesday after a poll showed a narrowing lead for Prime Minister Boris Johnson’s Conservative Party in an election later in the week, while U.S. dollar movement looked to the Federal Reserve’s policy meeting. Investors were also focusing on what U.S. President Donald Trump will do with U.S. tariffs on nearly $160 billion worth of Chinese consumer goods, due to set in on Dec. 15. Investors have generally believed the tariffs would be at least postponed to salvage a trade deal with China. “It is calmness before storm. Markets have long believed the additional tariffs will be avoided,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank. Sterling fell 0.25% to $1.3122, giving back about a cent after hitting an 8 1/2-month high of $1.3215 on Tuesday. It also slipped to 0.8455 pound per euro, off its 2 1/2-year high of 0.8394 touched earlier this week. On the yen, it changed hands at 142.77 yen, down from Tuesday’s seven-month high around 143.39.


A closely watched model from pollsters YouGov showed Britain’s prime minister is on course to win a majority of 28 in parliament at Thursday’s election, down sharply from a forecast of 68 last month. The pound had rallied for the past couple of months on rising expectations that Johnson will secure an outright majority in parliament after a Dec. 12 election to end Britain’s political paralysis over Brexit since 2016. The dollar was traded at 108.80 yen, flat in early Asia after a gain of 0.15% the previous day. It drew firmness from a Wall Street Journal report of officials from both the United States and China saying the groundwork was being laid to push back the Dec. 15 tariff deadline. The White House’s top economic and trade advisers are expected to meet in coming days with Trump over that decision, one person briefed on the situation said. Economic uncertainty stemming from the U.S.-China trade war has prompted the U.S. Federal Reserve to cut interest rates three times this year. It is almost unanimously expected to leave interest rates unchanged on Wednesday. Fed Policymakers’ updated projections for the U.S. economy and interest rates will be the main focus to assess whether they think the rate cuts so far are enough to keep the economy rolling for another year. The euro stood at $1.1092, having risen 0.23% on Tuesday after the ZEW research institute's monthly gauge on economic morale among German investors showed improvement far beyond that of December. The index rose to near a two-year high of 10.7 from -2.1 a month earlier, exceeding even the highest forecast in a Reuters poll of economists, aided by an unexpected rise in October exports boosting hope for an upturn in Europe’s biggest economy. The euro’s strength helped to push down the dollar index to 97.515, not far from a one-month low of 97.350 touched on Friday.

 

US Dollar

 

Reuters: The dollar slipped against the euro on Tuesday after a better-than-expected German economic sentiment survey boosted the common currency, while sterling hit a eight-month high against the greenback ahead of Thursday’s British general election. The euro was 0.28% higher at $1.1093 after the ZEW research institute’s monthly index on economic morale among German investors showed the mood improved far more than forecast in December, with an unexpected rise in October exports boosting hopes for an upturn in Europe’s biggest economy. “Germany’s ZEW expectation readings turned sharply positive possibly indicating a bottom is in place,” Edward Moya, senior market analyst at OANDA, said in a note. “The current assessment remains deeply in negative territory but did improve and beat expectations,” he said. The boost to the euro was unlikely to significantly change its direction against the greenback, John Doyle, vice president of dealing and trading, at Tempus Inc in Washington, said.


The common currency is down about 3.3% against the dollar this year. Currency market moves on Tuesday were fairly muted as investors awaited developments from central bank meetings in the United States and Europe and as a Dec. 15 deadline for the next wave of U.S. tariffs on Chinese goods fed caution in global markets. “The dollar is in familiar ranges, which is the new normal,” said Doyle. Investors are almost certain the Federal Reserve will leave rates unchanged when its two-day meeting ends on Wednesday, while the European Central Bank is likewise expected to keep interest rates steady on Thursday. Investors were also awaiting the outcome of Britain’s general election. “Central bank meetings and the UK election are the biggest risk events this week so we see volatility picking up a touch starting tomorrow afternoon,” he said. U.S.-China trade talks remain in flux with little certainty about whether Washington will impose the new round of tariffs if the two countries are unable to agree on a limited trade deal by Dec. 15. The dollar was up 0.16% versus the safe-haven Japanese yen at 108.72 yen. The Chinese yuan, the currency most sensitive to the U.S.-China trade war was little-changed against the U.S. dollar in the offshore market, last at 7.0285. 

 

South African Rand

 

EWN: The rand weakened as much as 1% against the US dollar as state power utility Eskom said it planned more load shedding after the flash flooding caused the largest power blackouts in more than a decade. Eskom’s dollar bonds fell to multi-month lows after the firm announced the move and South Africa’s President Cyril Ramaphosa cut short his state visit Egypt so he could return home and meet with the firm. Mining operations across the country are shutting down as a result of the blackouts, threatening a key export sector in a further blow to the country’s already slowing economy. “This flamed concerns that we could see a repeat of the first quarter in which load-shedding was the main culprit behind the economic contraction,” said Jacques Nel at NKC African Economics.


Eskom’s 2023 dollar bond issue was down 1.4, its biggest daily drop in 16 months, to 99.9 cents in the dollar, while the 2025 issue matched those falls, Tradeweb data showed. As of 0530 GMT this morning the rand was trading at R14.79 to the dollar, R16.41 to the euro and R19.44 to the pound.

 

Global Markets

 

Reuters: Asian stocks drifted on Wednesday as Sino-U.S. trade talks showed little progress ahead of a weekend deadline for the imposition of additional U.S. tariffs, and the pound wobbled as opinion polls pointed to a tight British election on Thursday. MSCI's broadest index of Asia-Pacific shares outside Japan drifted 0.1% higher, as markets in the region wavered either side of flat. Japan's Nikkei traded 0.2% lower, Australia's S&P/ASX 200 rose by the same margin. Shanghai blue chips added 0.1%. U.S. stock futures were 0.1% lower. Faced with often conflicting reports, investors have begun to suspect that even if U.S. tariffs due to take effect on Sunday are delayed, it could take until 2020 before Washington and Beijing can agree a preliminary deal to wind back their trade war. “Every day we get a little bit of a nudge one way or the other,” said Rob Carnell, Asia-Pacific chief economist at ING in Singapore. “You just don’t know who to believe, whether these comments have any basis in reality or whether they’re a negotiating tactic.”


In the absence of harder news on the trade front, investors’ focus was locked on the U.S. Federal Reserve’s policy meeting and its outlook for the economy due at 2000 GMT, as well as Britain’s election. The Fed is widely expected to hold rates steady, with investors interested in whether the central bank changes its view of the economy and its 2% growth forecast for next year. U.S. inflation data due at 1330 GMT, expected to hold steady, may further reduce chances for rate cuts next year should it surprise on the upside. The biggest mover of the morning among currencies was the British pound, which shed 0.3% to hit $1.3128 after a closely watched YouGov poll showed the ruling Conservatives tracking toward a much slimmer majority than forecast a fortnight ago. The pound recouped some losses during the day, but still sat well under the eight-month high struck overnight, when investors were more confident of a Conservative victory and expected it could end uncertainty over Britain’s exit from the European Union. YouGov’s research director, however, said the results showed a hung parliament was possible. “Granted, this still portrays a Tory (Conservative) majority but given what is already priced ... the actual outcome has resulted in some of the heat coming out of a fairly frothy market,” said Chris Weston, head of research at Melbourne brokerage Pepperstone. While China and the United States have still to settle differences on trade, officials from Canada, Mexico and the United States signed a fresh overhaul of the quarter-century-old North American trade pact. A Wall Street Journal report that said U.S. and Chinese officials were preparing for a delay to the Dec. 15 round of tariffs knocked bonds but did not shift stocks since it suggested no resolution to the trade conflict. White House trade adviser Peter Navarro said on Tuesday that U.S. President Donald Trump would make a decision soon on whether to enforce or suspend the tariffs. Overnight the Dow Jones Industrial Average and the S&P 500 each fell 0.1%, while the Nasdaq dropped by a little less. The yield on benchmark 10-year Treasury notes, which moves inversely to price, last stood a little higher at 1.8329%. Elsewhere among currencies, the dollar nursed overnight losses against the euro after German economic sentiment sharply rose after an unexpected rebound in October exports. The kiwi dollar drifted 0.3% lower to $0.6526 as the government trimmed its growth forecasts and announced a long-term fiscal spending program. U.S. crude dipped 0.5% to $58.92 a barrel, while gold was steady at $1464.80 per ounce.

Daily Brief - 11/12/2019

Hong Kong Office

 

Bristish Pound

 

FXStreet: GBP/USD pulls back from three-day low, still carries a 0.5% loss. YouGov’s MRP model increases the fears of a hung parliament. Tory candidates keep getting criticized, eyes on US CPI, Fed meeting for now. GBP/USD pulls back from the recently flashed three-day low to 1.3122 during Wednesday’s Asian session. The pair plummeted after YouGov’s latest poll based on the MRP model suggested that the ruling Conservatives will struggle for the majority after December 12 elections in the United Kingdom (UK). The latest YouGov MRP outcome increases doubts over the ruling Conservatives’ parliamentary majority after Thursday’s majority as the poll predicts 339 seats for the Tories versus 359 prior forecasts. The poll also says that the opposition Labour Party will grab 231 seats, an addition of 20 seats from November 27 prediction, after the election.

 

This means a close call for a hung parliament in the UK after the election, which in turn raises fears for the Prime Minister (PM) Boris Johnson’s Brexit deal. The main agenda behind calling this snap election by the Tory leader was to get a quick go through the Parliaments on his Brexit deals with the European Union. However, a hung parliament will defy his cause and could raise troubles for the cable traders. Not only the polls but the recent criticism of the Conservative candidates, including the PM, over various instances have been highlighting the fears of a surprise outcome.

 

Analysts at TD Securities say, “With GBP up sharply in recent weeks, we think our base case is fully priced - or very close to it. Confirmation of a solid Tory majority may see a knee-jerk move higher in cable, but is vulnerable to "sell the fact" profit-taking and a shakeout of stale positions once the result of the election is known. As such, we would not chase cable higher in the immediate aftermath even if sterling may be a buy on dips further out.” Market players may also emphasize on the November month Consumer Price Index (CPI) data from the United States (US) ahead of the last Federal Reserve (Fed) meeting of the year 2019. While the inflation numbers are likely to stay mostly sluggish, the Fed’s hints to 2020 and the Chairman Jerome Powell’s speech will be the key to watch. Only if the pair stays below 1.3100, it can revisit November highs near 1.2985, except that pair’s recovery to March/April lows near 1.3272/80 can’t be ruled out.

 

US Dollar

 

Reuters: The next major factor for the pair lies in the Federal Reserve interest rate decision later today. We will also have the US November CPI which is expected to tick up to 2.0%year, 2.3%year ex-food & energy. The Fed will release the policy decision, economic and rate Projection Materials at 19:00 GMT. 2:00 EST while the Fed Chairman Powell will read his statement and hold a news conference starting at 19:30 GMT, 2:30 EST. No change is expected with markets fully priced for a steady hand on the federal funds rate at 1.50-1.75%. However, the statement will be key as will the quarterly Summary of Economic Projections, especially the “dot plot” which will 'plot' the likely path of interest rates.

 

"In September, the median dot for end-2020 was 1.88% and higher again in 2021 but with a wide range of dots. Risks are for these to be lowered, despite the FOMC’s broadly upbeat outlook," analysts at Westpac explained. "For the markets and the US dollar the key to this FOMC lies in the Projection Materials," Joseph Trevisani, Senior Analyst at FXStreet, explained. Will the governors mark down their fed funds estimate for next year to take account of the current 1.75% rate or will they see a brighter future and raise their GDP and rate projections for 2020. This rather straightforward economic analysis will either propel or retard the dollar for the next several weeks.

 

Japanese Yen

 

FXStreet: Indecisive in the open of Tokyo, trading around session highs and lows. Brexit/UK elections keep risk appetite at bay, while US CPI and FOMC come to the fore from here. The risk of a bearish extension will increase on a break below 108.40. USD/JPY has been as high as 108.85 prior to the open and sent down to a low of 108.66 in recent trade and then back to the 108.70s as the price attempts to stabilise. It has been a choppy start in Asia today ahead of what is likely to be a volatile rest fo the week into the close. 

 

The advance in the USD/JPY pair fell short of changing the dominant bearish tone, as it would need to move at least beyond 109.30 to start attracting speculative buying. In the 4-hour chart, the pair has settled above a mild-bearish 20 SMA but remains below the larger ones. Technical indicators in the mentioned time frame, continue lacking directional strength, stuck around their midlines. The risk of a bearish extension will increase on a break below 108.40.

 

Global Markets

 

Reuters: Asian stocks flatlined on Wednesday as Sino-U.S. trade talks approached a weekend deadline with little sign of progress, while a tightening of the UK election race knocked the pound. Investors are beginning to suspect that even if U.S. tariffs due to take effect on Sunday are delayed, it may be 2020 before Washington and Beijing can agree a broader rapprochement. In the absence of detailed trade news, focus moves to the U.S. Fed’s outlook for the economy due at 2000 GMT - along with an expectation interest rates will be held steady - and Thursday’s British election. “The market is just so singularly focused on the trade thematic, it seems to push everything else aside,” said James McGlew, executive director of corporate stockbroking at Perth broker Argonaut.

 

“These things never end well. Tariffs and artificial barriers in economies can never level the playing field the way proponents theorize it will ... no-one wins until this stops, its as simple as that.” MSCI’s broadest index of Asia-Pacific shares outside Japan barely budged. Japan’s Nikkei ticked lower after White House trade adviser Peter Navarro said a decision on the Dec. 15 tariffs would come soon, also knocking modest early gains off Australia’s S&P/ASX 200. The biggest mover of the morning was the British pound, which shed 0.3% to hit $1.3128 after a closely watched YouGov poll showed the ruling Conservatives tracking toward a much slimmer majority than forecast a fortnight ago. The pound had climbed to an eight-month high overnight, before the survey, as investors priced in a comfortable Conservative victory and expected it could end years of uncertainty over Britain’s exit from the European Union.

 

The Dow Jones Industrial Average and the S&P 500 each fell 0.1%, while the Nasdaq dropped by a little less. The yield on benchmark 10-year Treasury notes, which moves inversely to price, last stood a little higher at 1.8399%. U.S. inflation data due at 1330 GMT, expected to hold steady, may further decrease the likelihood of 2020 rate cuts should it surprise on the upside. The Fed is widely expected to hold rates steady at the conclusion of Wednesday’s policy meeting, with investors instead focused on any change to the central bank’s view of the economy and its 2% growth forecast for next year.

 

Elsewhere in currencies, the dollar slipped against the euro overnight as German economic sentiment sharply rose after an unexpected rebound in October exports. U.S. crude dipped 0.25% to $59.09 a barrel, while gold was slightly lower at $1463.526 per ounce.

 

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