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Daily Brief - 16/07/2020

London Office


British Pound


Reuters: Sterling was dragged up by a weaker dollar and an improvement in risk sentiment on Wednesday, with analysts saying it was likely to face further weakening due to economic damage inflicted by the coronavirus crisis and Brexit. The pound was up 0.5% at $1.2610, having risen to $1.2649, its highest since Monday. Against the euro, sterling rose by 0.2% to 90.58 pence, a whisker off the two-week low of 91.12 it fell to the day before. “From an FX perspective it is always about the relative, and we would argue that the relative macro position for the UK is looking grimmer than most other major economies. That will lead to further sterling weakness ahead,” said Derek Halpenny, head of research at MUFG. “With the Brexit impediment thrown in on top, sterling will increasingly be viewed as part of the solution in providing stimulus through further depreciation ahead,” Halpenny added.

Talks on Britain’s future relationship with the European Union will be a major topic of bloc business from September, but until now Britain has shown insufficient realism about what can be achieved, Germany’s Europe Minister Michael Roth said. After gross domestic product data for May rose by a smaller amount than expected, investors question whether the already announced fiscal stimulus measures will be enough to prop up the economy, expecting the Bank of England to increase its quantitative easing programme and lower interest rates further. Britain’s five-year government bond yields fell last week below zero and “more subdued recovery in the UK will see market rates go more negative over the coming weeks,” Halpenny estimated. Speculators are shorting the pound, with most recent CFTC positioning data showing that leveraged funds held $1.28 billion in shorts, though the amount had decreased in recent weeks and was not nearly as high as around the same time last year.


US Dollar


Reuters: The dollar found support on Thursday as simmering Sino-U.S. tensions and weak Chinese consumption data knocked investors’ faith in a fairly swift global economic recovery from the coronavirus crisis. China’s 3.2% economic growth last quarter easily beat market expectations for 2.5%. But an unexpected drop in retail sales - for a fifth straight month - was an unwelcome harbinger of possible problems ahead for the rest of the world as more countries relax lockdowns and allow businesses to reopen. The growth-sensitive Australian dollar slipped under 70 cents after the data, and the greenback clambered off an overnight one-month low against a basket of currencies. “While in general it’s fair to say that the numbers beat expectations, what the numbers also reveal is that we’re seeing that the China consumer remains behind,” said National Australia Bank FX analyst Rodrigo Catril in Sydney. “That cautiousness is something the market is looking at in terms of countries where the consumer plays a bigger role, so that’s obviously relevant for the U.S. as well.”

The Aussie was last down 0.3% at $0.6988, the kiwi 0.2% softer at $0.6557 and the Chinese yuan fell off a four-month high in offshore trade to 6.9962 per dollar. Surging U.S. virus cases also dampened sentiment and weighed on equity markets as focus shifts to Europe, and the region’s recovery plans, as well as rising global tensions. Britain on Wednesday ordered that equipment from China’s Huawei be purged from its communications network by 2027, prompting a warning from Beijing, while China and the U.S. are at loggerheads over issues from trade to technology. President Donald Trump has not ruled out additional sanctions on top Chinese officials over Beijing’s crackdown in Hong Kong, a White House spokesman said on Tuesday. The New York Times also reported his administration is considering a sweeping ban on travel to the United States by Chinese Communist Party members, citing four unnamed people with knowledge of such discussions. The cautious drift in markets recoups some of the dollar’s losses this week as investors had cheered promising progress toward a coronavirus vaccine, pulling most of the majors back toward the ranges they have marked for more than a month. “The broad dollar is at a crossroads,” said OCBC FX strategist Terence Wu. It is under pressure, but its near-term fate, he said, rests with the euro and the outcome of today’s European Central Bank meeting and the weekend’s EU Summit. The euro has pulled back from a four-month top hit overnight, but remained supported in Asia at $1.1402. The ECB is all but certain to keep policy on hold on Thursday, which would keep pressure on political leaders to agree on a recovery plan at a Friday-Saturday conference in Brussels.


South African Rand


Reuters: South Africa’s rand raced to a new one-month best on Wednesday in a broad rally by risk assets spurred by progress towards a COVID-19 vaccine. At 1515 GMT the rand was 1% firmer at 16.5650 per dollar from an opening level of 16.7200. It led a rally by emerging market currencies as the U.S. dollar slumped to a one-month low and investors chased returns and ditched safe-havens. The U.S. company Moderna has produced an experimental COVID-19 vaccine that provoked immune responses in all 45 volunteers, sparking a risk-on mood. The euro, a barometer for global risk demand, rose to a four-month high against the dollar on expectations European Union leaders may agree on stimulus and deepening fiscal integration to shield the economy from the COVID-19 pandemic. “With the pandemic peak unlikely to occur until September, the economy cannot be put on hold until then. But South Africa’s COVID-19 spike certainly illustrates what can happen in EM after lockdown restrictions are relaxed,” said Francesca Beausang, senior economist at Continuum Economics.

South Africa was set to reach 300,000 COVID-19 cases on Wednesday, the most in Africa and in the global top 10, despite a swiftly imposed lockdown aimed at preventing infections which was tightened on Sunday by President Cyril Ramaphosa. Consumer inflation figures showed price-growth near a 16-year low, but analysts are divided on whether this will prompt the central bank to add to the 275 basis points of lending rate cuts it has made since the beginning of the year. Following global markets which raced up on Thursday on hopes of a vaccine and a quicker economic recovery, the FTSE/JSE All Share Index closed up 0.75% at 55,947 points, while the FTSE/JSE Top 40 Companies Index ended up 0.73% at 51,607 points. Bonds also firmed, with the yield on South Africa’s 2030 government issue 8 basis points lower at 9.375%. 


Global Markets


Reuters: Asian shares and U.S. stock futures fell on Thursday, weighed down by concern about deteriorating U.S.-China relations and the economic cost of a resurgence in coronavirus infections that is prompting some governments to reimpose containment measures. Even news that China’s economy rebounded more than expected in the second quarter from a record contraction was not enough to pull regional equities out of the red. European markets looked set to follow Asia lower, with Euro Stoxx 50 futures falling 0.83%, German DAX futures down 0.73%, and FTSE futures off 0.53%. MSCI’s broadest index of Asia-Pacific shares outside Japan slid by 1.18%, while Tokyo’s Nikkei fell 0.74%. U.S. S&P 500 e-mini stock futures declined by 0.43%. Shares in China fell 1.59% and Australian stocks shed 0.9% after the country’s jobless rate jumped to the highest since the late 1990s. Shares in Hong Kong and Seoul also fell. Oil futures also declined after OPEC and its allies agreed to scale back output cuts, renewing concerns over excess supply.

Risk appetite took a hit due to worries about a wide-ranging dispute between the United States and China over the control of advanced technologies and the protection of civil liberties in Hong Kong. A second wave of coronavirus infections is also triggering a return to restrictions on business and personal activity that threaten to impede economic recoveries. “The upside in financial markets is limited by the visible increase in coronavirus infections and tension between the world’s two economic giants,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management Co. “However, the downside is limited due to very low interest rates and a brighter outlook for China’s economy.” China’s economy expanded by a better-than-expected 3.2% in the second quarter from a year earlier, returning to growth as lockdown measures ended and policymakers stepped up stimulus. But its recovery is still uneven. Separate data showed China’s industrial output beat expectations in June, but retail sales unexpectedly fell again, suggesting consumer demand remains weak. U.S. crude fell 0.78% to $40.88 a barrel. Brent crude fell 0.62% to $43.52 per barrel following plans from OPEC and its allies to ease supply curbs. In the currency market the Australian dollar, the New Zealand dollar, and the Chinese yuan all fell against the U.S. dollar amid rising risk aversion.







Daily Brief - 16/07/2020

Hong Kong Office


US Dollar


Reuters: The dollar nursed losses on Thursday and riskier currencies found support on signs of progress in developing a coronavirus vaccine, even as the virus itself continues to spread and investors fret over simmering Sino-U.S. tensions. The growth-sensitive Australian dollar held close to 70 cents and near a month high. The euro hovered just below a four-month top touched overnight on hopes that European leaders can agree on a recovery fund. The mood pushed the safe-haven Swiss franc  half a percent lower overnight and it lifted the crude price and oil exporters' currencies along with it. The Norwegian krone rose to a one-month high of 9.2715 per dollar and the Canadian dollar advanced to a week high of 1.1305 on the greenback. Moves in Asian morning trade were small as markets waited for Chinese growth data due around 0200 GMT for the latest update on the recovery of the world’s second-largest economy. 


Both the euro and the Aussie are now testing key resistance levels, ANZ analysts said, with sentiment favouring the upside after the positive early results from a test of U.S. company Moderna’s experimental vaccine. Study results showed all 45 healthy volunteers given doses of the Moderna vaccine had high levels of virus-killing antibodies, although the experimental drug’s efficacy in stopping the virus is not yet clear. “Results like this are encouraging,” the ANZ analysts said in a note. “Without a vaccine, devastating health impacts will continue, with significant economic implications. The stakes couldn’t be higher.” The Australian dollar last sat at $0.7000 and the euro at $1.1415. The New Zealand dollar spent the morning either side of flat and last bought $0.6564. Gains were capped by worries about surging infections across the United States where new cases are rising by about 60,000 per day. 


Global tension also remains elevated, with Britain ordering equipment from China’s Huawei be purged from its communications network by 2027, prompting a warning from Beijing, and China and the U.S. at loggerheads over issues from trade to technology. President Donald Trump has not ruled out additional sanctions on top Chinese officials over Beijing’s crackdown in Hong Kong, a White House spokesman said on Tuesday. Sterling held steady at $1.2591 and the yen was very marginally firmer at 106.86 per dollar. Investors’ focus in the Asian day is on second-quarter GDP data from China, along with June factory output, retail sales and fixed-asset investment. Against a basket of currencies the dollar is down 0.6% this week so far and last sat at 96.019, just above a one-month low struck overnight.


Australian Dollar


FXStreet: The AUD/USD pair is struggling to draw bids as Australia's jobless rate ticked higher in June and full-time employment tanked. The pair is currently trading in the red at 0.6994, having hit a high of 0.7012 before the release of the jobs data. Australia's jobless rate rose to 7.4% as expected, having increased to 7.1% in May from 6.4% in April and the participation rate rose to 64% versus expectations for 63.6% and 62.9% previous. Indeed, the Australian economy added 210.8K jobs in June compared to expectations for 112.5K additions, having shed 227.7K jobs in May. However, full-time employment fell by 38.1K following an 89.1K drop in May. 


The weak data validates RBA's dovish stance on interest rates. The policymakers clarified in July's meeting that the cash rate will remain flat until progress is made towards full employment and inflation is within the 2%-3% target. The uptick in the jobless rate coupled with the escalating tensions between the US and China could keep the Aussie dollar under pressure during the day ahead. US President Donald Trump, on Tuesday, signed an executive order to shun Hong Kong’s special trading status and threatened additional steps that got the expected response from China.


As per the latest reports, the US is said to be weighing a sweeping travel ban on Chinese Communist Party members, a move that is likely to prompt sharp retaliation. The S&P 500 futures are flashing red at press time, a sign of impending risk aversion, that could add to bearish pressures around the Aussie dollar. It seems the optimism generated by the news of coronavirus vaccine has faded. 


Chinese Yuan


FXStreet: Offshore Yuan (CNH) continues to trade in the red despite a bigger-than-expected rebound in China's economy in the second quarter. The USD/CNH pair is trading at 6.9874, representing a 0.10% gain on the day. At 02:00 GMT, China reported a second-quarter gross domestic product (GDP) of 11.5%. The growth rate was expected to rebound to 9.6% quarter-on-quarter from the first quarter's -9.8%. Meanwhile, consumer spending for June, as represented by retail sales, came in at -1.8% year-on-year versus expectations for a 0.3% rise and -2.8% previous. Industrial production rose 4.8% year-on-year in June, beating expectations for a 4.7% rise, following May's 4.4% growth. 


So far, the upbeat GDP and factory data have failed to put a bid under yuan. The Chinese currency's dismal response could be attributed to rising tensions between the US and China. President Trump, on Tuesday, signed an executive order to shun Hong Kong’s special trading status and threatened additional steps that got the expected response from China. As per the latest reports, the US is said to be weighing a sweeping travel ban on Chinese Communist Party members, a move that is likely to prompt sharp retaliation. 


Another possible reason for the sustained uptick in USD/CNH could be the losses in the US stock futures and the resulting demand for the safe-haven US dollar. At press time, the S&P 500 futures are down more than 0.20%. It appears as though the escalating tensions between the US and China are now overshadowing the optimism generated by the news of coronavirus vaccine. President Donald Trump, Oxford Scientists, and US health official Fauci said on Tuesday that the vaccine for the deadly virus will be out soon. Earlier this week, biotech firm Moderna Inc's experimental vaccine for COVID-19 showed positive results in clinical trials. 


Global Markets


Reuters: Asian shares look set to continue a march upwards as optimism over a coronavirus vaccine carry weight over the ongoing spread of the disease and simmering U.S.-China tensions. Australian S&P/ASX 200 futures rose 0.37% in early trading. Japan’s Nikkei 225 futures added 0.07%, and Hong Kong’s Hang Seng index futures rose 0.25%. E-mini futures for the S&P 500 rose 0.19%. MSCI’s gauge of stocks across the globe closed up 1.16%. A run of promising news in efforts to develop a COVID-19 vaccine ran through U.S. markets. An experimental vaccine produced by biotech startup Moderna Inc showed it was safe and provoked immune responses in volunteers, an early- stage trial showed on Tuesday. There were also reports of pending positive news on vaccine work from the University of Oxford.


“U.S. equities continued to defy all gravity as investor optimism revels amid the progress in developing a vaccine which continues to reign supreme,” wrote Stephen Innes, chief global markets strategist at AxiCorp, in an analyst note. In the United States, stocks closed sharply higher on the vaccine news, buttressed by a strong quarterly report from Goldman Sachs. A new report from the Federal Reserve also found U.S. businesses saw an uptick in activity as states relaxed restrictions, although uncertainty about the outlook remained with coronavirus cases spreading. The Dow Jones Industrial Average rose 0.85%, while the S&P 500 gained 0.91% and the Nasdaq Composite grew 0.59%. Oil prices rose thanks to a drop in U.S. crude inventories, but gains were limited by plans from OPEC and its allies to ease supply curbs. Brent crude settled up 89 cents, or 2.1%, at $43.79 a barrel.


Investors appeared willing to take on more risk in currency markets, pushing the safe-haven U.S. dollar to a one-month low. The dollar index fell 0.105%, dropping below 96 for the first time since June. The risk appetite was also evident as U.S. Treasury yields rose and the yield curve steepened, indicating a wider spread between long- and short-term interest rates. Investors will be watching for new economic data out of China, which will release figures on second-quarter GDP data on Thursday, along with June factory output, retail sales and fixed-asset investment. A Reuters poll found analysts expect China to report 2.5% economic growth, reversing a 6.8% first-quarter decline driven by the pandemic. 


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