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21 / 09 / 20
Reuters: Sterling edged lower on Friday as rising COVID-19 cases and the Bank of England signalling it is examining negative interest rates kept the currency under pressure. The pound was down 0.21% versus the euro at 0.9153 at 1453 GMT, and down 0.13% against the dollar at $1.2956, after falling to $1.2866 on Thursday when the BoE said it was looking more closely at sub-zero rates in case economic woes deepen. After the pound gained some ground in early trade on data showing British shoppers kept spending last month, investors turned tail as Britain signalled it was considering whether to impose a second national lockdown. New COVID-19 cases almost doubled to 6,000 per day, hospital admissions rose and infection rates soared across parts of northern England and London. The prospect of a chaotic end to the Brexit transition period in December if Britain fails to agree a trade deal with the European Union also continues to overhang sterling.
The BoE kept its main stimulus programmes on hold this week, as expected, and said that Britain’s economy had performed better than expected. But highlighting risks relating to rising COVID-19 cases, the unwinding of jobs protection schemes, and Brexit, the BoE said it was ready to take further action. Kit Juckes, head of FX strategy at Societe Generale, said that with the pound already very close to record lows touched in 1976, “negative rates can take sterling to a new all-time low.” “Cutting rates to below zero in the wake of a decision to leave the EU without a trade deal, would indeed seem reckless,” Juckes added. ING analysts wrote in a note to clients that they expect EUR/GBP to test 0.9300 again this month. “We continue to see more downside to GBP as not enough risk premia is priced into the currency.”
Reuters: The dollar slipped and yen and yuan led Asia’s currencies a little higher on Monday, as investors looked ahead to a slew of U.S. Federal Reserve speakers this week and to a decision on the inclusion of Chinese government bonds in a global index. Moves were slight and volumes light due to a public holiday in Japan. The dollar index, which tracks the greenback against a basket of six major currencies, dipped 0.2% to 92.779. The yen and yuan rose about 0.3% each, with the yen touching a seven-week peak of 104.27 per dollar and the yuan hovering just below a 16-month high it hit last week. Foreigners’ Chinese bond buying has helped put the yuan on a tear, lifting it nearly 6.5% in four months. Investors are expecting FTSE Russell will include China in its World Government Bond Index on Thursday, likely triggering even more inflows and supporting the currency. “The assets under management tracking this index is big...so we are seeing some pre-positioning taking place,” said Bank of Singapore currency analyst Moh Siong Sim. “But it’s not just the index, the bigger picture here is that the (Chinese) economy is doing well, there’s an interest-rate differential that is supporting the currency and a Biden victory (at the U.S. election) might provide further relief.”
The yuan edged back toward last week’s 16-month high in Asia, rising to 6.7570 in onshore trade and pulling with it the Australian, Singapore, New Taiwan dollars as well as the Malaysian ringgit. The Aussie rose 0.4% to $0.7319, near the top end of its range of the last few weeks. The ringgit hit a seven-month high of 4.1100 on the dollar and the Singapore dollar made an eight-month peak of S$1.3543 per greenback. The Taiwan dollar jumped 0.7% to a seven-year high of 28.935 per dollar, a move analysts said might be due to a combination of equity inflows and authorities seeking to project calm amid heightened cross-straits tensions. The euro and sterling crept toward the top of ranges they have occupied for a couple of weeks, with the euro last at $1.1867 and sterling at $1.2958. The yen looked to break new ground, extending a week of solid gains amid trepidation about the global economic outlook and perhaps a shift in the yen’s drivers as central banks pin rates around the world at or below zero. The yen is up nearly 2% in five consecutive weeks of gains. “The yen is deeply undervalued on standard metrics, private sector portfolio outflows appear to have slowed, and the Bank of Japan seems to have little appetite for more deeply negative rates,” Goldman Sachs analysts said in a note. “For these reasons we see downside risk to our 12-month dollar/yen target of 105.” In the short term, analysts said the Fed’s lower-for-longer commitment on rates would drag on the dollar, though close attention will be paid to remarks from committee members this week for any more clues on the new approach to inflation. Fed Chairman Jerome Powell is due to appear before Congressional committees later this week while Fed committee members Lael Brainard, Charles Evans, Raphael Bostic, James Bullard, Mary Daly and John Williams also make public speeches. “The dovish Fed will remain a background negative for the dollar,” said Terence Wu, strategist at Singapore’s OCBC Bank. “Powell’s testimony on Tuesday will draw attention, but for now the Fed is likely done playing their cards.” Asia’s laggard was the New Zealand dollar, which had a muted 0.2% rise to $0.6773 ahead of a central bank meeting on Wednesday. No policy changes are expected but talk of negative rates could drag on the kiwi.
SOUTH AFRICA OFFICE
South African Rand
Reuters: South Africa’s stock market corrected sharply during the week after a strong open on Monday as poor retail sales data and a host of bleak company outlooks added to the effects of weaker commodity prices and quarter-end profit taking. The main index of the Johannesburg Stock Exchange (JSE), one of the best performing globally since the mid-March crash, reversed most of the last few sessions’ gains to fall back to levels last seen in the middle of last week. The benchmark FTSE/JSE all share index closed 0.66% lower on Friday at 54,674 points. The FTSE/JSE top 40 companies index lost 0.59% to close at 50,399 points. Both the indices fell by around 3% this week. “When you have a market that has had a good run, there will obviously be profit booking,” said Franco Lorenzani, an independent senior analyst. He said as the September quarter end approaches, there will be many more investors looking to lock in the profits seen since March.
The South African rand hit its best level in six months against the dollar this week after the central bank kept lending rates unchanged on Thursday and with the dollar losing ground on downbeat U.S. data. It retreated a little on Friday, however. At 1730 GMT, the rand traded at 16.3075 per dollar, down 0.96%. It has risen 2.75% this week. The South African Reserve Bank (SARB) left its main lending rate unchanged at 3.50%, saying risks to economic growth and consumer inflation were balanced. “The U.S. dollar’s retreat bodes well for the local unit, which has breached its 200-day moving average of 16.58,” said Nema Ramkhelawan-Bhana from Rand Merchant Bank in a report, adding that the 16.00 level last seen in mid-March was now firmly in sight. Government bonds firmed with the yield on benchmark 2030 paper down a basis point to 9.18% by 1730 GMT.
Reuters: Asian shares and most currencies held tight ranges on Monday, as investors awaited developments on U.S. fiscal stimulus and coronavirus vaccines amid a resurgence of infections in Europe. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.1% weaker, though it was not too far from a June 2018 peak at 568.84. Australia's .AXJO benchmark index slipped 0.5% while New Zealand's stumbled 0.6%. Chinese shares opened in the red with the blue-chip index down 0.3%. “While the economic recovery continues, momentum is clearly slowing,” Kathy Bostjancic, chief U.S. financial economist at Oxford Economics wrote in a note. “The second phase of the recovery will likely be bumpy and fraught with pitfalls,” Bostjancic added. “The development of the pandemic remains the overriding factor driving the economy, discussions on the fiscal policy, and ultra loose policy by the Fed.” On Friday, U.S. stocks declined with the Dow down 0.9%, the S&P 500 losing 1.1% and Nasdaq Composite dropping 1.07%. The signal from futures was not very optimistic, with the S&P 500 e-minis falling 0.1% and pointing to a weak start for Wall Street on Monday. Japanese markets were closed for a public holiday.
Coronavirus cases have now surpassed 30 million, casting a gloomy pall over prospects of a V-shaped economic recovery. The biggest threat to global growth is a resurgent pandemic, with analysts fearing growth and inflation could surprise on the downside in the coming year. A lack of material development on U.S. stimulus package is also an overhang, they said. Adding to worries, European countries from Denmark to Greece announced new restrictions on Friday to curb surging coronavirus infections in some of their largest cities, while Britain was reported to be considering a new national lockdown. “Where is the inspiration for the equity bulls, I ask? We have diminishing prospects of fiscal stimulus, crazy valuations and a firm focus on an ugly U.S. election and COVID shutdowns, which suggest short-term risks for equities,” said Pepperstone strategist Chris Weston. “Of course, the lack of early movement may be a red herring as the news, perhaps the Oracle/TikTok deal aside, can hardly be perceived as positive, but there has been no risk aversion expressed in FX, through this illiquid period.” The dollar slipped 0.1% against a basket of major currencies to 92.855. Against the safe haven yen, the greenback eased 0.2% to 104.35 to drift closer to a recent 3-1/2 month trough. The euro was up 0.25% at $1.2946 while the risk-sensitive Australian dollar was also slightly higher at $0.7304. The British pound GBP= was up 0.25% at $1.2947. Currency strategists said the dollar weakness may signal more volatility ahead of the Nov. 3 U.S. elections where Republican President Donald Trump will face off against Democratic challenger Joe Biden. Pepperstone’s Weston expects the safe-haven yen to remain well bid. “In a world where real rate differentials increasingly drive capital flows, in developed market, FX Japan has the highest and positive real yields, and even more so when adjusting for hedging costs,” Weston said. “This makes the JPY very attractive, especially against the GBP and USD, where real rates are not just negative but in the case of the Fed, they are actively seeking lower rates out.” In commodities, U.S. crude slipped 2 cents to $43.13 a barrel. Brent crude fell 1 cent to $41.1. Gold was slightly lower, with spot prices at $1,951.3 an ounce.