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DAILY BRIEF

 

 

The Daily Brief is a free email sent out each morning with information about overnight market movements and insights into the issues of the day. The brief is free and will help you keep an up-to-the-minute eye on the currency markets.

 

27 / 03 / 20

LONDON OFFICE

 

British Pound

FXStreet: While joining the chorus to cheer the US dollar weakness, GBP/USD pierces 1.2300, currently up 0.50% around 1.2265, ahead of the London open on Friday. In doing so, the Cable takes clues from the coronavirus (COVID-19) outbreak at home as well as Brexit pessimism. Moving on, traders await the US House votes on the COVID-19 Relief Bill for near-term direction. The US toppled China with more than 81,000 virus cases whereas the BBC cites the highest single-day increase in the UK’s death toll, by 103 to 578, on Thursday. Elsewhere, the Guardian cited deep differences between the UK and EU over the Brexit talks that are already in the deep freeze for now while the Mirror said that the UK won't take part in EU drive for ventilators because of Brexit.The Bank of England (BOE) failed to offer any fireworks due to a lack of ammunition while disappointing UK Retail Sales, to 0.0% from 0.8% YoY forecast, also couldn’t recall the bears.


On the other hand, the US dollar registered broad weakness as the markets’ weighed multiple concerns ranging from downbeat employment data to the outbreak in the US. The risk-tone remains mildly positive with the US 10-year treasury yields being above 0.80% and most Asian stocks flashing the gains. While the uncertainty over the House voting on the key bill is likely to keep the pair on the front-foot a likely passage could trigger the pair’s pullback on the news. As a result, traders will keep eyes on the macros for fresh direction while the US Michigan Consumer Sentiment Index could offer intermediate direction.

 

US Dollar

Reuters: The dollar was on track for its biggest weekly fall in more than a decade on Friday as a series of stimulus measures around the world, including a $2.2 trillion U.S. package, helped temper a rout in global markets triggered by the coronavirus pandemic. Data showing an unprecedented rise in U.S. jobless claims underscored the virus’ devastating impact on the economy, but subsequent rise in Wall Street shares raised hopes that a torrent of selling in risk assets may have run its course for now. The dollar fell more than 1% to 108.35 yen, due largely to Japanese repatriating funds ahead of their fiscal year end on March, after having shed 1.44% overnight. The euro also stayed firm at $1.1041 after a jump of 1.40% on Thursday. The biggest mover among major currencies was sterling, which rose 2.8% overnight before giving up part of that gain in early Asian trade. The British pound last stood at $1.2183.


An easing in dollar funding conditions is helping to reduce demand for the dollar. The number of Americans filing claims for unemployment benefits surged to a record of more than 3.28 million last week as strict measures to contain the coronavirus pandemic unleashed a wave of layoffs. While that eclipsed the previous record of 695,000 set in 1982 and was up 3 million from last week. The forecast ranged from one to five million or even larger. “Until last week, we had been fussing over the difference of tens of thousands in this data. What we can say now is, basically markets have factored in the fact that the economy will be hit hard,” said Kazushige Kaida, head of foreign exchange at State Street Bank. “It helped that the U.S. Senate has passed the stimulus bills. There appears to be no repeat of the nightmare during the previous crisis,” he said. He was referring to market shocks after the U.S. House of Representatives voted down an emergency financial bailout bill in late September 2008 following the collapse of Lehman Brothers. The unprecedented $2.2 trillion stimulus was expected to be approved by the U.S. House of Representatives on Friday, or on Saturday. The dollar’s index against six other major currencies edged down after having lost 1.5% on Thursday, its biggest daily fall in almost four years.

SOUTH AFRICA OFFICE

 

South African Rand

PoundSterlingLive: The Rand was buffeted again on Thursday amid fresh volatility in risk markets, enabling the Pound-to-Rand rate to climb above a key level on the charts, ahead of Moody's latest credit rating decision although one major bank has told clients the South African currency could weather a downgrade this Friday. South Africa's Rand underperformed the bulk of its emerging market rivals on Thursday, in line with the Chinese Yuan, and despite steep slump in the value of the Dollar both of which helped the Pound-to-Rand rate to climb above the 50% Fibonacci retracement of its January 2016 downtrend. That retracement, located at the 20.62 level, has been a tough nut to crack for Sterling given frequent bouts of weakness in the British currency. Sterling crossed the 20.62 level on Thursday and whether it remains above there come Friday evening's close in New York will me a milestone development in the outlook for the Pound-to-Rand rate. And there's a good chance this will happen if analysis from Credit Suisse is right about South Africa's credit rating prospects. Moody's will decide on Friday whether to leave the South African government rating at 'investment grade' or to downgrade it to 'junk'. 


"Moody’s will publish its rating decision after local markets close on Friday (27 March). When Moody’s conducts its coming review, South Africa government’s debt dynamics will look much worse than it did a few weeks ago," says Shahab Jalinoos, head of FX strategy at Credit Suisse. "A downgrade will lead to an initial spike in USDZAR perhaps taking USDZAR 3%-4% higher initially (i.e. above 18.00 from current levels). Low liquidity in Asian trading hours on Monday could exacerbate the initial move." Moody's is the last major agency to still have South Africa as an investment grade borrower and crucially, it is one of two that must rate South Africa as such a high quality borrower for the country to remain in the FTSE World Government Bond Index, once known as the Citi World Government Bond Index. And without inclusion in that index international fund managers who benchmark to it would be compelled to sell their South African government bonds, potentially inciting large outflows from the currency. Foreign holdings of South African government debt were R316bn (£15 bn) in 2019 according to the statistical annexe included by Treasury in the February budget update and it was always thought that a large portion of that debt would end up being sold on the open market following a downgrade. However, foreign outflows from South Africa have picked up sharply in the last month since the budget and so much so the Rand may already have paid part of the price of a Moody's downgrade. Jalinoos says there's been around $4bn (£3.3bn) of outflows since February 20, which is equal to around 20% of foreign holdings. "We could imagine a potential spike in USDZAR to be temporary and short-lived in the context of a market which already saw substantial unwind of positioning," Jalinoos writes in a research note Thursday. "We believe that at least part of the aggressive selloff in local bonds in the past few days is a result of pre-positioning for a downgrade." Jalinoos says the outlook for the rating has darkened in recent weeks due to the outbreak of coronavirus in South Africa, which will reduce GDP and necessitate higher government spending in the form of welfare payments and assistance for companies. That will mean a larger budget deficit and a higher debt-to-gdp ratio that's exactly the opposite of what Moody's has been looking for. And this is after the February budget already revealed an earlier deterioration. However, Jalinoos also says that due to the exceptional circumstance thrown up by the coronavirus, Moody's could decide to defer the rating decision until a later date. 

 

Global Markets

Reuters: Asian stocks rose on Friday as investors wagered policymakers will roll out more stimulus measures to combat the coronavirus pandemic after U.S. unemployment filings surged to a record. MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.2%. Australian shares gave up gains to fall 1.09%, but Japan's Nikkei rose 1.44%. E-Mini futures for the S&P 500 reversed course and fell 0.95% in Asia following three consecutive days of gains in the S&P 500 on Wall Street. The dollar nursed losses against major currencies as central banks’ steps to solve a dollar shortage in funding markets started to gain traction. The U.S. House of Representatives is expected to pass a $2 trillion (1.64 trillion pounds) stimulus package later on Friday that will flood the world’s largest economy with money to stem the damage caused by the pandemic. The U.S. Federal Reserve has already slashed rates to zero and launched quantitative easing. The Fed will also take the unprecedented step of offering a direct backstop for corporate loans.


The United States is now the country with the most coronavirus cases, surpassing even China, where the flu-like illness first emerged late last year. Policymakers may need to offer more stimulus as the virus slams the brakes on economic activity and increases healthcare spending. “I’m not sure what measures are left, but the reaction in stocks shows some people hoping for more stimulus thought the market was a little oversold,” said Yukio Ishizuki, FX strategist at Daiwa Securities in Tokyo. “Currencies tell a different story. The dollar is the lead actor. The mad rush to buy dollars due to liquidity concerns is starting to fade.” The number of Americans filing claims for unemployment benefits surged to a record of more than 3 million last week as strict measures to contain the virus pandemic ground the country to a sudden halt, data showed on Thursday. The jobless blowout was announced shortly after Fed Chairman Jerome Powell said the United States “may well be in recession”, an unusual acknowledgement by a Fed chair that the economy may be contracting even before data confirms it. Global equity markets took the data in their stride, partly as most central banks have already aggressively eased policy and governments are backing this up with big fiscal spending. Chinese shares, battered this month because of the virus, rose 0.8% on Friday. Shares in South Korea, another country hit hard by the pandemic, jumped by 1.62%. Leaders of the Group of 20 major economies pledged on Thursday to inject over $5 trillion into the global economy to limit job and income losses from the coronavirus. In the currency market, the greenback fell 0.89% to 108.64 yen in Asia, on pace for a 2% weekly decline. The dollar was also headed for weekly declines against the Swiss franc, pound, and euro. The U.S. currency’s fall after two weeks of gains suggests that the Fed’s efforts to relieve a crunch in the dollar funding market are working, some analysts said. The yield on benchmark 10-year Treasury notes rose slightly in Asia to 0.8160%, while the two-year yield edged up to 0.2809%. Yields were still headed for a weekly decline, taking cues from the Fed’s extraordinary steps to bolster markets and the $2 trillion stimulus package. U.S. crude ticked up 2.08% to $23.07 a barrel. Brent rose 1.14% to $26.64 per barrel. Energy markets have been caught in a tug-of-war between hopes for stimulus spending and worries about excess oil supplies. Gold, normally bought as a safe haven, was slightly lower. Spot gold fell 0.44% to $1,626.16 per ounce. Gold market participants remained concerned about a supply squeeze after a sharp divergence between prices in London and New York. The virus has grounded planes used to transport gold and closed precious metal refineries.

 

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