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Sterling weakened on Wednesday after data showed inflation fell more than expected in September and before a European Union summit at which Britain will try to unblock stalled negotiations for a Brexit deal. Economic data had briefly redirected traders’ attention towards the British economy and away from Brexit this week after figures on Tuesday showed the strongest wage growth for workers in a decade. But weaker-than-expected consumer price inflation, which came in at an annual rate of 2.4 percent in September versus forecasts of 2.6 percent, pushed down a pound already weakened by a BBC report that Britain would not seek to extend the Brexit transition period. The pound has largely shrugged off a deterioration in the Brexit talks in recent days and remained calm, but traders say it remains at the mercy of the negotiations. “As important as the data is, the market is still focused on Brexit,” said Neil Mellor, a strategist at BNY Mellon.
The pound, trading down 0.3 percent at close to $1.3150 before the data was released, fell further and hit a day’s low of $1.31, down more than half a percent on the day. Against the euro, sterling dropped to 88.06 pence, down 0.3 percent on the day before recovering as a broad dollar rally hit demand for euros. The Bank of England has said tighter monetary policy depends on Britain agreeing a trade deal with the EU. But it also wants to see signs of more wage growth, which could feed into inflation. BoE Deputy Governor Jon Cunliffe said on Wednesday this week’s data does not yet show that wages are growing as strongly as the bank had predicted they would earlier this year. Nomura economist George Buckley said sustained faster wage growth should eventually lead to a faster pricing of interest rate increases. “With Brexit uncertainty high, the market won’t price that immediately, but if wages maintain this momentum, a sharp upward shift in rates pricing will follow in due course, we think,” he wrote in a note to clients.
Reuters: The dollar traded stronger versus its major peers on Thursday after minutes from the U.S. Federal Reserve’s September meeting affirmed expectations that the central bank is likely to continue raising interest rates this year. Every Fed policymaker backed raising interest rates last month and also generally agreed borrowing costs were set to rise further. Interest rate futures are now pricing in an 83 percent likelihood that the Fed raises rates in December, according to the CME Group’s FedWatch Tool, the fourth hike this year. Two more increases are likely next year. The dollar index, which measures its value against six major peers, traded at 95.664, up 0.1 percent on Thursday.
“The dollar is being bid as there is follow through support post the release of the FOMC minutes,” said Ray Attrill, head of currency strategy at NAB. “Dollar bulls are playing to the view that the market is under-pricing what the U.S. Fed can do,” added Attrill. U.S. benchmark 10-year treasury yields climbed to 3.2 percent on Thursday. The last time they traded below the psychologically important 3 percent level was Sept. 18. The euro changed hands at $1.1501 on Thursday. The British pound lost 0.12 percent versus the dollar on Thursday to $1.3096, weakening after European Union’s chief Brexit negotiator Michel Barnier’s comments on Wednesday that more time was needed to secure an exit deal for Britain.
SOUTH AFRICA OFFICE
South African Rand
BDLive: The rand was weaker on Wednesday afternoon as the dollar gained on the euro ahead of the release of the US Federal Reserve’s federal open market committee (FOMC) minutes later in the day. The minutes are likely to re-affirm the Fed’s hawkish stance on interest rates, despite earlier criticism from US President Donald Trump that the Fed is “crazy” to continue with its interest-rate hiking strategy. The dollar also gained on the euro as it seems increasingly likely that a Brexit deal between the EU and the UK will not be reached at the EU summit in Brussels. A “no-deal scenario” is looking increasingly likely after EU Council president Donald Tusk said on Tuesday that he harboured “no grounds for optimism” which could roil eurozone markets and produce sharp swings in the pound, Dow Jones Newswires reported. The biggest snag in EU-UK discussions may centre on the issue of trade between Ireland and Northern Ireland, the latter being part of the UK.
The UK is slated to leave the EU on March 29 next year and talks are expected to be completed by mid-November. However, analysts say much of the weakness in the euro has already been priced in. If the euro doesn’t break from the present range to go higher, it would be “a worrying sign for us”, ING analysts said in a note. “We are surprised that the euro isn’t doing better, given that emerging-market currencies are showing signs of recovery and the dollar is consolidating.” Further losses in the rand were capped by better-than-expected retail sales data for August, released earlier in the day. Retail sales rose an annual 2.5%, from an upwardly revised 1.4% in July and much higher than the expected 0.3%. At 2.56pm, the rand was at R14.2388 to the dollar from R14.1646, at R16.4206 to the euro from R16.395, and at R18.6652 to the pound from R18.6754. The euro was at $1.1531 from $1.1574. Local bonds edged firmer with the yield on the R186 bid at 9.145% from 9.165%. The US 10-year treasury was last seen at 3.1507% from 3.1648%.
Reuters: The Canadian dollar changed hands at 1.3022. The dollar has gained 1.6 percent versus the loonie over the last twelve trading sessions. The Japanese yen broke a four-day winning streak versus the dollar on Wednesday, as the greenback gained 0.65 percent versus the Japanese currency. The yen changed hands at 112.65 to the dollar on Thursday. The dollar has gained 0.9 percent versus the yen since Monday, when the yen hit a one-month high of 111.61. The Australian dollar, often considered a barometer of global risk appetite, changed hands at $0.7126 on Thursday, gaining 0.24 percent versus the greenback on the back of a strong unemployment report.
The Aussie hit a two-year low of $0.7039 on Oct. 5 and analysts still expect the currency to remain under pressure. “The combination of a strengthening U.S. dollar and commodity price pressures could bring a test of the two-year low around $0.7040 in the coming sessions,” said Sydney based Michael McCarthy, chief market strategist at CMC Markets. Elsewhere, in a document keenly awaited by markets, the U.S. Treasury Department’s semi-annual currency report, released on Wednesday, did not name China or any other trading partner as a currency manipulator. “The fact that they refrained from labelling China a currency manipulator is a positive development, especially from the point of view of emerging market currencies,” said Attrill.