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Daily Brief - 19/10/2018

London Office

 

British Pound

 

Reuters: The pound fell to intraday lows in late Thursday trade, as summit talks in Brussels failed to resolve a Brexit standoff between London and the EU over the status of the Irish border, an issue playing an increasingly dominant role in negotiations. Prime Minister Theresa May said late in the day that a solution to the impasse might come through the option of extending the Brexit transition period. But that failed to lift the British currency from lows hit after she earlier said European Union proposals for avoiding a hard Irish border were unacceptable. Sterling fell as low as $1.3057, down 0.4 percent on the day, from near $1.31 before May spoke, and dropped 0.3 percent versus the euro to 88.03 pence. Tim Graf, State Street Global Markets’ EMEA Head of Macro Strategy, said that despite the pound looking “very cheap” Brexit remained a major risk. “The market seems very complacent about the headlines which really don’t look constructive,” he said.


European Council President Donald Tusk said on Thursday that he was sure EU leaders would respond positively to any request from Britain for a longer transition period. Elsa Lignos, global head of FX strategy at RBC, said a longer transition period made the need for a ‘backstop’ on Ireland - a proposal aimed at avoiding a hard border - less likely. “It remains to be seen if Brexiteers in her party can be persuaded to sign on,” Lignos said. A flurry of data this week, including the strongest wage growth for a decade, have briefly focused traders’ attention on the UK economy and away from Brexit negotiations, although investors say the pound remains at the mercy of the talks. On Thursday, data showed UK retail sales fell by the most in six months in September. The sales volumes dropped by 0.8 percent in September from August - a bigger fall than economists had expected in a Reuters poll - after the largest decline in food purchases since October 2015, official data showed. “We’ve had three data points from the UK in the last three days with only the unemployment figures providing any real support for the pound,” David Cheetham, chief market analyst at broker XTB, said. “Despite this, sterling continues to keep calm and carry on despite the obvious Brexit threat with negotiations on this front clearly not progressing as many would’ve hoped.”

 

US Dollar

 

Reuters: The U.S. dollar rose to one-week highs against the euro on Thursday after the European Commission said Italy’s 2019 budget draft is in serious breach of EU budget rules. The step prepares the ground for what would be an unprecedented rejection of a member state’s fiscal plan. The euro tumbled to $1.1455, its lowest against the greenback since Oct. 9, on the news. The single currency and the British pound also dropped as summit talks in Brussels failed to resolve a Brexit standoff between London and the EU over the status of the Irish border, an issue playing an increasingly dominant role in negotiations. “It’s a combination of concerns in regards to the somewhat strong language at the EU commission has taken in regards to the submission of the Italian budget,” said Bipan Rai, head of North American foreign exchange strategy at CIBC Capital Markets in Toronto. “Additionally we still do have that looming uncertainty in regards to Brexit.”


The dollar was also supported by hawkish minutes from the Federal Reserve’s September meeting released on Wednesday, which showed that Fed policy makers are largely united on the need to raise borrowing costs further. The Japanese yen gained as U.S. stocks sank more than 1 percent, hurt by weak industrial earnings that raised worries about rising expenses and the impact of tariffs. China’s currency traded near a three-month low against the dollar after a semiannual report by the U.S. Treasury refrained from naming China a currency manipulator but showed concern about yuan depreciation. “Of particular concern are China’s lack of currency transparency and the recent weakness in its currency,” said Treasury Secretary Steven Mnuchin. By stating that the Treasury will monitor and review the yuan’s moves over the coming six months, “the U.S. explicitly noted that it stands ready to name China in its April 2019 report,” Citigroup analyst Calvin Tse said in a report. Deutsche Bank strategists termed the Treasury report “as a bit of an escalation without being too dramatic.” The greenback gained 0.29 percent against the Chinese currency to 6.95 per dollar.

 

South African Rand

 

BDLive: The rand was largely unchanged on Thursday afternoon as the dollar continued to consolidate around $1.15 to the euro ahead of expected further interest-rate hikes in the US. The market has priced in another hike in December, with three more increases expected in 2019, which would take rates in the US to a level slightly above neutral. Neutral is the level of interest rates judged to be neither accommodative nor punitive to the economy. The dollar rose to its best level in two weeks on Wednesday, as the US Federal Reserve signaled that the strong economy continues to justify additional interest-rate increases, Dow Jones Newswires reported. Oanda analyst Craig Erlam said the Fed minutes re-affirmed the widely held opinion at the US central bank that interest rates have further to rise, including another hike this year. “Why this came as such a surprise is something of a mystery as the minutes didn’t appear to deviate from the message after the meeting when the central bank raised interest rates and removed the reference to policy being accommodative,” Erlam said.


Elsewhere, the breakdown of Brexit negotiations on Sunday has left investors sceptical that any substantial progress will be made at the EU summit this week. The pound was stable against the dollar as market participants still believe a deal will eventually be reached, despite the March 2019 deadline approaching, the newswires said. Local mining production continued on its downward trajectory in August, slipping even further by an annual 9.1%, following July’s contraction of 4.1%, revised upwards from a decline of 5.2%. This was notably above market expectations of a 4.0% fall. The mining numbers are likely to drag SA’s GDP growth down in 2018, despite higher-than-expected retail sales data released on Wednesday. Capital Economics predicts that that full-year GDP growth will be just 0.5%. At 2.58pm, the rand was at R14.2647 to the dollar from R14.2498, at R16.4055 to the euro from R16.3903, and at R18.6902 to the pound from R18.6904. The euro was at $1.1501 from $1.1500. The pound was at $1.3103 from $1.3114. Local bonds were largely unchanged with the R186 bid at 9.15% from 9.13%. The benchmark US 10-year treasury was last seen at 3.2010% from 3.2018%.

 

Global Markets

 

FXStreet: In forex today, the Asian market session produced little volatility as traders take stock of how things have developed over the week, and Friday's proceeding European and US sessions will decide how the week wraps up. American equities saw continued declines to finish off Thursday's trading, and Asian stocks followed suit as investors continue to grapple with global stability headwinds stemming from a US Federal Reserve on the hawkish war path, the ever-present US-China trade war, and continued Brexit struggles that continue to see plenty of rhetoric thrown at headlines bit little in the way of progress. China's GDP figures also clocked in a contraction in the headline growth reading in the Asian markets, though the AUD/USD was surprisingly undeterred in spite of the economic warning signs from their largest trading partner, competing with the USD/JPY as the gainer of Friday's first third. The AUD/USD picked itself up off of the floor to trade back into 0.7110, gaining some 20ish pips in the process, while the USD/JPY continued a bullish recovery from Thursday's low of 111.95 and is now trading near 112.40 as Dollar traders brought the major pair back to more acceptable levels.


Italy worries continue to hang over the EUR, and Italian debt markets are driving the yield differential between Italian and German government bonds to extreme readings as the fracas between Italy's spend-happy government budget plans and the EU's fiscally-staunch leadership in Brussels, while the Euro continues to swoon against the Greenback as markets adapt to a US Fed that openly considers the concept of 'above-neutral- interest rates. Brexit finagling continues to go nowhere quickly, and as FXStreet's own Omkar Godbole noted, "UK's Theresa May signaled yesterday that she would consider extending the transition to allow more time for UK and EU negotiators to solve problems around key issues like the Irish border. Further, the European Commission's Jean-Claude Juncker said that any request for an extension to the Brexit transition period by the UK would be considered "positively" and likely be accepted. Still, the Pound struggled to pick up a bid in Asia as markets believe that Theresa May will have a hard time selling the extension at home. Moreover, as Reuters report says, May's strategy is being criticized by both sides - Brexit supporters accuse her of making Britain a vassal state while the EU supporters say the offer is the worst of all worlds."
 

 

Daily Brief - 19/10/2018

Hong Kong Office

 

British Pound

 

FXStreet: After moving sideways near the 1.31 mark during the first half of the day, the GBP/USD pair came under a consistent selling pressure during the American trading hours and fell to its lowest level in two weeks at 1.3022. As of writing, the pair was trading a couple of pips above that level, losing 0.7% on a daily basis.

 

The lack of progress in Brexit negotiations weighed on the pound on Thursday. Following her meeting with EU leaders at the EU summit in Brussels, British Prime Minister Theresa May appeared at a press conference and said she was convinced that they would be able to reach a good deal. "The idea of extended transition is an idea that has been around a while. We are not proposing an extension to the implementation period," May further added. Meanwhile, European Council President in a published statement stated that EU27 confirmed their desire to continue Brexit talks in a positive spirit. "We should be clear that, as for now, not enough progress has been made," the document further read. Reflecting the GBP weakness, the EUR/GBP pair rose to a daily high above 0.88.

 

The initial support for the pair aligns at 1.3000 (psychological level) ahead of 1.2925 (Oct. 3 low) and 1.2855 (Sep. 3 low). On the upside, resistances could be seen at 1.3050 (100-DMA), 1.3100 (20-DMA) and 1.3130 (daily high).

 

US Dollar

 

Reuters: The U.S. dollar rose to one-week highs against the euro on Thursday after the European Commission said Italy’s 2019 budget draft is in serious breach of EU budget rules. The step prepares the ground for what would be an unprecedented rejection of a member state’s fiscal plan. The euro tumbled to $1.1455, its lowest against the greenback since Oct. 9, on the news. The single currency and the British pound also dropped as summit talks in Brussels failed to resolve a Brexit standoff between London and the EU over the status of the Irish border, an issue playing an increasingly dominant role in negotiations.

 

“It’s a combination of concerns in regards to the somewhat strong language at the EU commission has taken in regards to the submission of the Italian budget,” said Bipan Rai, head of North American foreign exchange strategy at CIBC Capital Markets in Toronto. “Additionally we still do have that looming uncertainty in regards to Brexit.” The dollar was also supported by hawkish minutes from the Federal Reserve’s September meeting released on Wednesday, which showed that Fed policy makers are largely united on the need to raise borrowing costs further. The Japanese yen gained as U.S. stocks sank more than 1 percent, hurt by weak industrial earnings that raised worries about rising expenses and the impact of tariffs. China’s currency traded near a three-month low against the dollar after a semiannual report by the U.S. Treasury refrained from naming China a currency manipulator but showed concern about yuan depreciation. “Of particular concern are China’s lack of currency transparency and the recent weakness in its currency,” said Treasury Secretary Steven Mnuchin.

 

Japanese Yen

 

FXStreet: USD/JPY was slapped off its perch overnight as Europeans handover over a tired looking cross to the north American desks that took no risk in holding it vs the stock market collapsing yet again.  The weakest line was the Asian markets that bled through to the European markets that were also contending with domestic political drams between the UK/EU deadlock and EC/Italian budget disagreements.

 

However, US stocks didn't like the reverberations from around the world with respect to the idea that the Fed could be on course to go beyond the neutral rate, (3%) following Wednesday's FOMC minutes. The pair slid heavily from there to a low of 111.95 with supply coming in around the Tenkan and Kijun lines at 112.79 and 112.87 - So it is now clear that the yen remains the number one haven currency - (USD/CHF rallies to trend highs). 

 

On a break below the 112 handle, Valeria Bednarik, chief analyst at FXStreet explained that a key dynamic support, the 100 DMA, is currently at 111.65, with a break below it opening doors for a slide down to the 111.00 figure during the upcoming sessions. On the upside, a break of trendline resistance, 112.84 is on the map and the 8th Oct lows ahead of R3, 113.43, is located at 113.13. In a return of risk-off flows, the 111.80/83 guards the uptrend support at 111.55 as a key destination before 111.20. We then have deeper levels below the 110 handle at 109.77 as the August low.

 

Global Markets

 

Reuters: Stocks in Asia fell on Friday as global sentiment soured on issues ranging from trade worries, Italy’s 2019 budget, higher U.S. interest rates and growth concerns in China that led to a slump in Chinese shares in the previous session. Early in the trading day, MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.4 percent weaker following losses on Wall Street overnight. The Dow Jones Industrial Average fell 1.27 percent, the S&P 500 lost 1.44 percent and the Nasdaq Composite dropped 2.06 percent. Australian shares were down 0.6 percent, while Japan’s Nikkei stock index was 1.7 percent lower. “Markets continue to digest the combination of higher U.S. rates, ongoing trade tension and Chinese growth concerns,” analysts at ANZ said in a note.

 

Oil prices ticked higher after falling on Thursday. U.S. crude was up 0.3 percent at $68.86 a barrel and Brent crude was trading at $79.56 per barrel, also 0.3 percent higher. Gold also rose, with spot gold trading at $1,225.56 per ounce.

 

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