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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.

 

06 / 12 / 19

LONDON OFFICE

 

British Pound

Reuters: Sterling hit 2-1/2-year highs versus the euro on Thursday, on growing confidence that next week’s election will give the Conservative Party the parliamentary majority it needs to deliver Brexit, ending near-term uncertainty. Recent opinion polls suggest the ruling Conservatives will win an outright majority in the Dec. 12 election, removing some of the political uncertainty that has weighed on the currency for the last 3-1/2 years. Prime Minister Boris Johnson called the snap election to break an impasse in parliament over Brexit. A majority in parliament for his Conservative Party should allow him to get his withdrawal agreement passed by lawmakers and take Britain out of the European Union by the Jan. 31 deadline. “The broad trend in the polls is not really changing now and the Conservative lead on my poll of polls is about 11 percentage points, which is reasonably sufficient to get them a reasonably decent majority,” said Adam Cole, chief currency strategist at RBC Capital Markets in London.


“With only a week to run to the election, if the trend in the polls stays flat, then sterling probably keeps going up.” Sterling was last up 0.2% against the euro at 84.39 pence, but earlier in the day it touched 84.31 pence, its strongest since May 2017. It has gained almost 10% from lows hit in August versus the common currency. Against the U.S. dollar, the pound rose 0.4% to $1.3144, having climbed as high as $1.3159, a seven-month high, taking its gains since October to more than 7%. Analysts said the breaching of key technical levels on Wednesday around $1.30 and 85 pence per euro, had accelerated the pound’s gains and encouraged traders to cover their short sterling positions. Investors still say the pound is cheap and could rise further if the Conservatives eventually secure a majority in parliament. Marco Pabst, chief investment officer at asset manager Union Bancaire Privee, said the pound’s discount was between 20% and 30%. “Once we have political stability in the country and this kind of implies a bigger Conservative-run government, I think this discount should narrow over the foreseeable future,” he said. The latest Reuters poll also suggested investor sentiment towards one of the most battered major currencies in recent years is turning. Almost all foreign exchange strategists surveyed were reasonably or very confident that Britain would leave the EU with a deal. The poll of nearly 60 foreign exchange strategists found sterling would rise 3% to $1.35 in 12 months. That compares with a $1.32 forecast made a month ago. In a sign of near-term caution, one-week implied volatility on sterling, a contract straddling the election, rose to its highest since late October.

 

US Dollar

Reuters: The dollar nursed a week of losses on Friday, hit by nervousness on trade and mixed signals about the U.S. economy, while the British pound stood tall as bets firmed that Prime Minister Boris Johnson can win a commanding electoral victory. The safe havens of the Japanese yen and Swiss franc were in demand as a hedge against Sino-U.S. trade talks collapsing, and as investors fretted that U.S. jobs figures due later in the day may fail to deliver an expected rebound. “Markets are in a highly fragile condition at the moment,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney. “So there is a greater potential for an exaggerated move if we see a big divergence from expectations on non-farm payrolls - but the risk is in both directions, particularly with the lack of trade news.” The euro held on to overnight gains against the greenback to buy $1.1104, having climbed 0.8% this week. The yen has added 0.9% on the dollar this week and was steady at 108.72 yen per dollar on Friday.


Against a basket of currencies the dollar has dropped every day this week for a cumulative loss of almost 1%. The best gains have been won by the soaring kiwi and British pound. The kiwi sat just below a four-month high touched on Thursday at $0.6541, having gained 1.8% this week as expectations for deep monetary easing have ebbed. Sterling climbed to a 2-1/2 year high of 84.28 pence against the euro overnight - holding near there on Friday - and has advanced 1.7% against the dollar this week, last trading at $1.3158. Opinion polls suggest the ruling Conservatives will win an outright majority in the Dec. 12 election, removing some of the uncertainty around Britain’s exit from the European Union that has weighed on the currency for years. Cable has rallied 10% since September lows. “There’s still a bit of nervousness about being too convinced,” said Jim Leaviss, head of fixed income at fund manager M&G Investments. “But nevertheless cable seems to think that we do get a clear majority for Boris Johnson,” he said. “That means that we leave the EU on the 31st of January...I think the options market was pricing in another 7% upside on a Conservative victory, and I think that’s justified fundamentally.” On the trade front, U.S. President Donald Trump remained upbeat overnight and said talks are “moving right along”. Worries stem from a lack of similar enthusiasm from the Chinese side, after Chinese officials reiterated their stance that some U.S. tariffs must be rolled back for a deal. The focus on U.S. non-farm payrolls, due at 1330 GMT, comes after dismal data through the week that showed weak private payrolls, soft services activity and a shrinking manufacturing sector. A Reuters poll shows a forecast of 180,000 jobs being added in November. “Below 150,000 or above 210,000 we could see a significant market reaction,” said CMC Markets’ McCarthy.

SOUTH AFRICA OFFICE

 

South African Rand

Reuters: South Africa’s rand was weaker on Thursday on lingering ecomnomic weakness highlighted by the country’s current account deficit and business confidence data. By 17:45 on Thursday, the rand was down 0.6% at 14.6820 per dollar from an overnight close of 14.6020. Data from the central bank on Thursday showed the country’s current account deficit has narrowed slightly but less than expected, while a measure of monthly business confidence showed businesses are still struggling with the tough economic climate and slack demand. Earlier in the week, a reading from the statistics agency showed the economy shrank 0.6% in the third quarter, raising concerns that the country could lose its last investment-grade credit rating from Moody’s. 


In equities, the benchmark JSE Top-40 Index slipped 0.5% to 48,589.71 points while the broader All-Share Index was down 0.4% at 54,779.76 points. “You’ve got this mood of uncertainty still as to how things are going to be fixed with power company Eskom and what could be done to get the economy kick-started,” said Ferdi Heyneke, portfolio manager at Afrifocus Securities. Eskom implemented further power cuts on Thursday after a number of generating units broke down. Services, trading, and distribution group Bidvest dropped 2.2% to 192.70 rand while retailer Mr Price Group declined 1.9% to 179.60 rand. Preventing further losses were resource shares, with platinum miner Impala up 3.8%. Gold Fields rose 3.1%, helped partly by stronger gold prices. Bonds were broadly flat, with the yield on the benchmark 2026 bond at 8.43%.

 

Global Markets

Reuters: Asian stocks gained on Friday as investors took heart from U.S. President Donald Trump saying trade talks with China were “moving right along”, and U.S. oil prices sat near 2-1/2-month highs after OPEC and other producers agreed to cut output. MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.5% and Japan's Nikkei added 0.3%. Australian shares rose 0.2% and South Korea's Kospi climbed 0.8%, while China's Shanghai Composite and Hong Kong's Hang Seng indexes gaining 0.1% and 0.9%, respectively. Trump’s upbeat tone in comments on Thursday was enough to spark buying, despite a lack of agreement between Washington and Beijing over whether existing tariffs should be dropped as part of a preliminary deal to end their trade war. “Many players have taken a wait-and-see attitude given a lack of fresh trading cues ahead of U.S. paryolls data and the Federal Reserve’s policy meeting. But clearly, the mood is quite positive,” said Yasuo Sakuma, chief investment officer at Libra Investments.


Investors were hoping that the two sides will reach a compromise to at least avoid their worst fears - that the United States will go ahead with its final batch of tariffs on about $156 billion of Chinese exports. Uncertainties over a deal have pushed some investors to the sidelines in recent sessions, while nervousness before the release of U.S. non-farm payrolls data later in the day could also curb market liquidity. Investors were also looking ahead to a Fed policy meeting on Dec. 1-11. A Reuters poll of economists and analysts showed the Fed would keep rates on hold at 1.50-1.75%. Oil prices retreated but hovered near recent peaks after major oil exporting countries agreed on Thursday to cut output by an extra 500,000 barrels per day in the first quarter of 2020, after a nearly six-hour meeting on Thursday. Details of the agreement and how the cuts will be distributed among producers still need to be ratified at a meeting in Vienna of OPEC and non-OPEC nations, otherwise known as OPEC+, on Friday. “The cut of an extra 500,000 barrels a day was not priced into the market, so the cut will be positive for the market if it is carried out,” said Tatsufumi Okoshi, senior commodity economist at Nomura. “But since OPEC countries haven’t fully complied with the existing cut, markets will probably have to wait to see how the cut will pan out,” he added. Brent crude futures dipped 0.3% to $63.20 a barrel, having struck its highest on Thursday since Nov. 28, while U.S. West Texas Intermediate (WTI) crude eased 0.2% to $58.31 per barrel, but was not far off Thursday’s 2-1/2-month high of $59.12. The agreement coincided with the initial public offering (IPO) of state oil firm Saudi Aramco, which was priced at the top of its range, raising $25.6 billion in the world’s biggest IPO. In the currency market, the British pound soared on growing confidence that next week’s election will give the Conservative Party the parliamentary majority it needs to deliver Brexit, ending near-term uncertainty. Sterling spiked to a seven-month high of $1.3166 on Thursday and last stood at $1.316, up 1.6% so far this week. It hit 2-1/2-year highs versus the euro. The euro stood at $1.1108, near a one-month high of $1.11165 set on Wednesday, lifted by firmer euro zone economic data.That helped push the dollar index to a one-month low of 97.356 on Thursday. The index last stood at 97.369. Against the yen, the dollar traded at 108.72 yen, having slipped slightly the previous day.

 

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