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Daily Brief - 19/11/2019

London Office


British Pound


Reuters: Sterling inched higher towards $1.30 Monday as the Conservatives lead in polls for Britain’s general election, boosting the chances of Prime Minister Boris Johnson’s withdrawal deal being passed by parliament before the Jan. 31 Brexit deadline. Johnson’s Conservatives lead the opposition Labour Party by 10 to 17 percentage points, four polls on the Dec. 12 election showed late on Saturday. A poll published by ICM for Reuters on Monday showed the Conservatives extending their lead over Labour to 10 points. “The market’s just moving to price in a higher likelihood of a majority for the Tories,” Lee Hardman, currency analyst at MUFG, said, using a colloquial name for the Conservative Party. “We’ve had the opinion polls at the weekend generally all showing increasing support for the Tory party, making the market more confident they could win a majority, seen as more favourable in the short term,” Hardman said.

In a conference of business leaders organised by Britain’s main business lobby, the CBI, Johnson said the government was postponing corporation tax cuts. The CBI’s director general warned that British businesses face the threat of extreme ideology from both the left and the right wing of politics. The pound was unchanged by her comments. The pound was last up 0.5% against the dollar at $1.2964 after touching $1.2985 earlier, its highest since October 22. If sterling rises above the $1.3012 level hit in October, it would be at its highest since May. Versus the euro, the pound strengthened further to reach a new six-month high of 85.22 pence, last trading around 0.2 percent higher at 85.49 pence. “The $1.30 level is quite a strong psychological resistance here,” Nomura’s Rochester said. “For it to really have momentum, you need to see the Labour Party’s manifesto not do as well as it did in 2017.” Left-wing Labour is expected to release its manifesto on Thursday. Analysts at JP Morgan wrote in a note to clients that a break above the $1.30 level was unlikely at this stage of the campaign cycle. Weekly futures data showed that positions betting against the pound versus the dollar fell in the week to Nov. 12 to the lowest levels since May. The net short position means that the pound has more potential to appreciate on good news than depreciate on bad news. Implied volatility gauges for sterling for one-month maturities - encompassing the election - jumped to more than 11%, nearly doubling from levels of around 6% earlier this month. This pushed out spreads between one-month and two-month maturities to widest levels since the June 2016 Brexit referendum vote.


US Dollar


Reuters: The dollar fell against the yen on Tuesday as receding hopes for a preliminary trade deal between the United States and China hurt demand for the greenback. The yuan touched a two-week low versus the greenback amid doubts about the U.S.-China trade war. The Australian dollar also fell after minutes from a Reserve Bank of Australia policy meeting showed central bankers considered cutting rates this month. There have been high expectations that the United States and China would sign a so-called “phase one” deal this month to scale back their 16-month long trade war. But the dollar took a hit on Monday after CNBC reported that China is pessimistic about agreeing to a deal, which suggests a resolution to perhaps the biggest risk to the global economy remains elusive. “The dollar tried to break above 109 yen, but it couldn’t because of worries about the trade deal,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo.

“The Treasury market is starting to reflect similar concerns about the lack of a trade deal,” Ishikawa added. “This will keep dollar/yen in a narrow range.” The dollar fell 0.11% to 108.55 yen, following a 0.09% decline on Monday. The dollar was quoted at $1.1067 per euro on Tuesday in Asia after falling to the lowest in almost two weeks. Against a basket of six major currencies, the dollar index stood at 97.856, close to a two-week low. The yield on 10-year Treasury notes fell slightly to 1.8049% in Asia, also approaching a two-week low as uncertainty boosted demand for the safety of government debt. Citing a government source, CNBC reported on Monday that Beijing was pessimistic about a trade deal with the United States, troubled by Trump’s comments that there was no agreement on phasing out tariffs. In the onshore market, the yuan fell to a two-week low of 7.0295 per dollar. Washington and Beijing have imposed tariffs on each other’s goods in a bitter dispute over Chinese trade practices that the U.S. government says are unfair. The tariffs have slowed global trade and raised the risk of recession for some economies. Many economists say the drag on global growth will remain as long as tariffs are in place. Currency traders were also wary of the dollar after Trump met U.S. Federal Reserve Chairman Jerome Powell on Monday amid the U.S. president’s repeated criticism that the Fed has not lowered interest rates enough. “Everything was discussed including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others, etc.,” Trump tweeted soon after the meeting, calling the session “good & cordial.” In a statement, the Fed said Powell’s expectations for future policy were not discussed, but Trump has for more than a year said the Fed was undermining his economic policies by keeping interest rates too high. Elsewhere in the currency market, the Australian dollar fell 0.25% to $0.6789 and declined 0.36% to 73.73 yen. Australia’s central bank “agreed a case could be made” for another cut in the 0.75% cash rate at its November meeting given unwelcome weakness in wages growth and inflation, minutes published on Tuesday showed. The RBA decided to hold steady, in part because of worries that further easing would harm savers and confidence. The central bank has already cut rates three times since June to an historic low. The Aussie took a hit last week after data showed Australian employment suffered its sharpest fall in three years in October, underlining the need for stimulus.


South African Rand


EWN: The rand weakened on Monday, as cautious investors awaited clues on monetary policy from the local central bank and some of the world’s major central banks, as well as developments in U.S.-China trade talks. At 1535 GMT the rand was 0.41% weaker at 14.7850 per dollar. South Africa’s central bank decides on lending rates for the last time in 2019 on Thursday, and the regulator is expected to keep the level unchanged at 6.5%. Twenty-one of 28 economists polled by Reuters in the previous week said the repo rate would remain unchanged at the 21 November meeting. The remaining seven said the monetary policy committee (MPC) would cut rates by 25 basis points. South Africa’s relatively high rates, combined with benign consumer inflation, has shielded the rand from large selloffs despite a deteriorating fiscal and economic outlook and is set to keep it below the 15.00 mark going into year-end. 

“Given how trade uncertainty and global growth fears have encouraged central banks across the globe to ease monetary policy, all eyes will be on the South African Reserve Bank’s rate decision later in the week,” said Lukman Otunuga, senior research analyst at FXTM. “Should the SARB adopt a cautious stance and express concerns over the South African economy, the rand will be thrown in the direct firing line.” Globally, focus is on minutes of the U.S. Federal Reserve’s October meeting expected on Wednesday, while markets also await the first major speech by European Central Bank President Christine Lagarde on Friday. On the bourse, the Top-40 index rose 0.82% while the broader all-share closed 0.74% higher. Bonds weakened, with the yield on the benchmark 2026 government issue inching up 2.5 basis point to 8.405%.


Global Markets


Reuters: Asian share markets were mixed on Tuesday, as another day awaiting clearer news on the progress of U.S.-China trade negotiations left investors bereft of trading motivation. MSCI’s broadest index of Asia-Pacific shares outside Japan inched 0.2% higher as hopes for stimulus in China lifted Shanghai blue chips by 0.8% and Hong Kong’s Hang Seng by 1%. Japan's Nikkei, however, shed 0.2% and South Korea's Kospi 200 dropped 0.3%. Australia's S&P/ASX 200 rose 0.4%. Volumes were light across the board. E-Mini futures for the S&P 500 were flat. “It’s subdued today for sure,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank’s Asia Treasury Department in Singapore, adding that focus was by default on efforts to resolve the trade war between the world’s two biggest economies that has dented global growth. “There are some lingering doubts over whether a phase one deal can be struck ... I think the suspicion is that there’s a lot more wrinkles to iron out than initially thought.” Overnight, CNBC had reported the mood in Beijing was pessimistic about the prospects of sealing an agreement.

On the other hand, a new extension allowing U.S. companies to keep doing business with Chinese telecoms giant Huawei suggested something of an olive branch. Still, neither morsel shed much light on progress in U.S.-China negotiations, and this week’s listless trading suggests optimism that resolution is near is beginning to run out of steam. “We’re still waiting,” said Michael McCarthy, chief market strategist at brokerage CMC Markets in Sydney. “The longer we go on, the more concerns will arise. The reality is the clock is ticking.” The next deadline in the dispute is Dec. 15, when another round of U.S. tariffs on Chinese good is scheduled to take effect. Wall Street’s main indexes traded mostly flat on Monday, looking for direction on trade, though they ended the day inching higher to record closing levels. The Dow Jones Industrial Average rose 0.1%. The S&P 500 gained 0.05%, and the Nasdaq Composite added 0.1%. The yield on benchmark 10-year Treasury notes rose to 1.8118% compared with its U.S. close of 1.808% on Monday. Currency markets were similarly indecisive and range-bound. The safe-haven Japanese yen climbed as high as 108.45 per dollar before retreating to trade flat at 108.64. The Australian dollar nudged 0.2% lower to $0.6793 after the central bank said it had seen a case for cutting rates this month. The biggest mover overnight was the British pound which headed towards $1.30 as four polls showed Prime Minister Boris Johnson's Conservative Party tracking toward victory at the Dec. 12 election. Sterling hit a one-month high of $1.2984 overnight, before retreating a little in Asian trade to settle around $1.2953. “Overall, risk-related plays will continue to be whipsawed by alternating headlines, but in the short term, risk-off plays may still have room to run as uncertainties persist,” said Terence Wu, a strategist at OCBC bank in Singapore. Spot gold, which has been closely tracking the fortunes of the Sino-U.S. trade dispute, was flat at $1,470.03 per ounce. U.S. crude dropped 0.18% to $56.95 a barrel. Brent crude fell to $62.34 per barrel.

Daily Brief - 20/11/2019

Hong Kong Office


Bristish Pound


FXStreet: GBP/USD continues to look north with a flag breakout on the daily chart. The impending golden crossover could invite stronger buying pressure. The path of least resistance for the GBP/USD pair remains to the higher side despite Tuesday's 0.19% drop. The daily chart shows the pair is holding the support at 1.2922 – the upper edge of the bull flag, which was breached to the higher side on Friday. Put simply, the flag breakout or the bullish continuation pattern and is accompanied by a falling channel breakout on the 14-day relative strength index.


Further, the 50-day moving average is looking set to cross the 200-day moving average in the next few days. The impending golden cross could bolster the bullish sentiment. The pair, therefore, remains on track to test and possibly break above the psychological hurdle of 1.30. The bullish case would weaken if the spot finds acceptance under 1.29. 


US Dollar


Reuters: The dollar and the safe-haven yen found support on Wednesday as a lack of clarity on U.S.-China trade talks kept investors cautious ahead of the release of minutes from the U.S. Federal Reserve’s last policy meeting. Moves were slight as jaded traders again weighed mixed messages on trade, with more upbeat reports offset by U.S. President Donald Trump delivering yet another warning of more tariffs if talks fail.


After falling overnight, the greenback rose a little on the Australian dollar to $0.6824 and on the New Zealand dollar to $0.6426. It was marginally higher against the euro at $1.1077 and against a basket of currencies the dollar last traded a little stronger at 97.862. The yen, regarded as a safe-haven by virtue of Japan's status as the world's biggest creditor, touched 108.37 per dollar, its highest since Friday. “It’s a very slightly risk-averse day,” said Westpac FX analyst Imre Spiezer. “There’s a slightly cautious tone and mixed messages from the trade war negotiations.”


The United States and China have been locked in tit-for-tat tariff hikes that have dented the global economy. Hopes for progress on the dispute had risen overnight when Bloomberg reported that negotiations, which failed in May, would be considered a baseline in deciding what U.S. tariffs on China would be rolled back. However, speaking at a cabinet meeting at the White House overnight, Trump noted that China was “moving along,” but any deal would need to be one he liked. “If we don’t make a deal with China, I’ll just raise the tariffs even higher,” he told a room filled with senior U.S. officials. The U.S. Senate’s unanimous passage of a bill aimed at protecting human rights in Hong Kong amid a crackdown on demonstrations was also seen likely to raise tensions between the negotiating parties. The Chinese yuan - the currency most sensitive to the trade dispute - dropped to a two-week low of 7.0335 per dollar in offshore trade early in the Asian day. Traders and analysts also widely expect China will cut its new benchmark lending rate when it is fixed at 0130 GMT.


Japanese Yen


FXStreet: USD/JPY has recovered 14 pips from session lows despite weakness in Treasury yields. The US equity index futures are also flashing red. The pair needs to rise above 109.07 to invalidate the bearish case. USD/JPY has recovered from session lows but remains on the defensive below 109.07. The pair is currently trading at 108.50, representing marginal losses on the day, having hit a low of 108.36 earlier today. The 14-pip recovery is somewhat confounding, given the futures on the S&P 500 are still reporting a 0.25% drop, courtesy of the renewed US-China political tensions.


Further, the US 10-year Treasury yield is trading at 1.769%, the lowest level since Nov. 4. Notably, the yield has shed 20 basis points since topping out of 1.972% on Nov. 7. While the pair has trimmed losses, the bias remains bearish the daily MACD histogram printing deeper bars below the zero line, a sign of the strengthening of bearish momentum. The relative strength index is also reporting bearish conditions with a below-50 print, validating the pair's recent breach of an ascending trendline from the Aug. 26 low of 104.45. The outlook would turn bullish if and when the pair finds acceptance above 109.07 (Nov. 18 high). That would invalidate the lower highs setup.



Global Markets


Reuters: Asian shares stumbled on Wednesday as the Sino-U.S. trade talks produced nothing but a stream of conflicting messages, while concerns about a glut of supply left oil prices nursing their biggest one-day loss in seven weeks. Figures from the American Petroleum Institute out late Tuesday showed a far larger rise in crude stocks than expected. That followed reports Russia was unlikely to deepen its cuts to crude output. Brent crude futures eased another 5 cents to $60.86 a barrel, after sliding 2.6% overnight, while U.S. crude CLc1 recouped a slight 8 cents to $55.29. The mood in share markets was subdued with MSCI's broadest index of Asia-Pacific shares outside Japan off 0.7%. Japan's Nikkei fell 0.8% and Shanghai blue chips 0.3%. E-Mini futures for the S&P 500 shed 0.26% and EUROSTOXX 50 futures 0.2%. The aggressive tone unsettled Wall Street and the Dow ended down 0.36%, while the S&P 500 lost 0.06% and the Nasdaq added 0.24%. Dour forecasts from retailers Home Depot and Kohl’s fueled worries about consumer spending, while the energy sector .SPNY was the S&P’s biggest loser as oil slid. 


“It was noticeable that fixed income markets rallied despite equity markets being stable, suggestive of a market that remains cautious about the growth outlook.” Yields on U.S. 10-year Treasuries dropped further to a two-week trough of 1.75%, with a marked flattening of the curve hinting at a possible return of recession fears. The dip in yields nudged the dollar down on the safe-haven Japanese yen and it was last at 108.47, though still within the 107.87 to 109.48 range of the last five weeks. The euro held at $1.1070 and faced chart resistance around $1.1090.


The dollar was steadier on a basket of currencies at 97.901. Investors are now awaiting minutes of the Federal Reserve’s last policy meeting where it cut interest rates and signaled a pause for the time being. “The minutes will elaborate on the Fed’s view that the downside risks to the U.S. economy have eased, and that a “material reassessment” of the economic outlook will be needed for it to cut rates again,” said Joseph Capurso, an analyst at Commonwealth Bank of Australia. “We see the FOMC now on hold until March, 2020.” The market has all but given up on the prospect of an easing in December, which is now priced at just 0.8%. A move in March is put at a probability of around 42%. FEDWATCH. The risk-off tone left spot gold a shade firmer at $1,473.73 per ounce.


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