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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.

15 / 06 / 21

British Pound

Reuters: Sterling was largely unmoved by Monday’s news that Britain is set to delay the end of social distancing measures as the government seeks to contain a rapid rise in COVID-19 infections. Prime Minister Boris Johnson is expected to announce a delay of four weeks to his February roadmap, under which his government signalled that all social restrictions to control the spread of the disease would be lifted “no earlier” than June 21. Sterling, which has been one of the best performing currencies in 2021 as investors bet on a strong British economic rebound, hovered just below recent highs.


Against the dollar it dipped as much as 0.3% to a one-month low of $1.4069 but recovered some ground to $1.4114, to trade flat on the day at 1445 GMT. The euro was 0.15% stronger against the pound at 85.90 pence , still stuck within the range of the past two months. ING analysts said a delay to the easing of restrictions was expected and investors were more focused on economic data. “We do not think this does too much damage to GBP, which instead will be focused on fresh macro updates on jobs and retail sales - both expected to be GBP supportive,” they wrote.


Speaking on Monday, Bank of England (BoE) Governor Andrew Bailey said managing nearly a trillion pounds ($1.4 trillion) of British government bond purchases would be a huge challenge for the central bank. The BoE has taken an initial step to slow the pace of asset purchases and investors are pricing in a first interest rate rise from record lows late next year. Britain’s relatively rapid COVID-19 vaccination rollout and signs of a strong economic rebound have bolstered sterling in recent months and encouraged investors to bring forward their expectations for some limited monetary tightening. The Bank of England gathers for its next policy meeting on June 24.

 

US Dollar

Reuters: The dollar hovered near multi-week highs on Tuesday, drawing support from traders wary of a surprise from the U.S. Federal Reserve which is set to begin a two-day policy meeting. Markets expect no immediate changes to monetary policy, but with positioning heavily loaded against the dollar, investors are leery of any shift in tone that could spark a rally. The euro perched at $1.2120, just above a one-month low of $1.2093 it hit last week. The yen hit a seven-session low of 110.15 per dollar. The U.S. dollar index held near the top of its recent range at 90.512.


“The Fed is confronted with a balancing act of walking a tight-rope between transition and tantrums,” said Vishnu Varathan, head of economics and strategy at Mizuho in Singapore. “A solid U.S. economic recovery flanked by inflation at a 13-year high demands some kind of acknowledgement, if not response,” he said. “The euro, Aussie, Yen and Singapore dollar levels all point to cognisance about upside dollar risks.” The Australian dollar has traded sideways this year, despite rapid rises in commodity prices, as markets have focused on U.S. data and the Fed to drive the U.S. dollar. The Aussie slipped marginally to $0.7705 on Tuesday after minutes from the Reserve Bank of Australia’s last meeting showed the bank was prepared to keep buying bonds even though the economy has recovered its pre-pandemic output.


The kiwi dollar and sterling were also settled in narrow ranges as market volatility gauges tick down to their lowest levels since the pandemic began roiling markets in February and March 2020. Ahead of the Fed’s statement and news conference on Wednesday, markets will eye U.S. retail sales and a manufacturing survey later on Tuesday - though mostly as a means of understanding the economic pressure on policymakers. So far Fed officials, led by Chair Jerome Powell, have stressed that rising inflationary pressures are transitory and ultra-easy monetary settings will stay in place for some time to come, although recent economic data has raised concerns that price pressure could force an earlier stimulus withdrawal. “While Powell will tread carefully, I expect that the Fed is warming to a more open discussion about tapering, to be formally announced in the September meeting,” Chris Weston, head of research at broker Pepperstone in Melbourne, said in a note to clients. “Any view that cements a formal announcement in September should be modestly USD bullish, but the risks are symmetrical as Powell will be keen to not hurt financial conditions,” he said.


Nearly 60% of economists in a Reuters poll expect a tapering announcement in the next quarter. In cryptocurrencies, bitcoin was able to steady above $40,000 on Tuesday and is approaching its 200-day moving average - finding support from the promise of fresh investment from major backer MicroStrategy and from Elon Musk. Tesla boss Musk on Sunday flagged that the carmaker could resume transactions using the token if miners can use cleaner energy to process them. Ether also got a small lift in sympathy with its bigger rival, and broke above its 20-day moving average to $2,593.40.

 

South African Rand

Reuters: South Africa's rand extended its losses on Monday as traders continued to cash in some of their gains on 2021's top performing emerging market currency. A fifth drop in six sessions left the rand down 0.42% at 13.73 to the U.S. dollar at 1445 GMT. It kept it almost 2.5% off its recent 28-month high. Analysts at Morgan Stanley said in their latest emerging market note that they were now backing alternative currencies such as the Russian rouble instead. "We believe that most of the positive news in South Africa is in the price and the rand's risk premium is now one of the lowest across EMFX," they said.


As well as a general pull-back in FX markets over the last week, South Africa has officially declared its third wave of COVID-19 infections and is Africa's worst-hit country. Over the weekend, President Cyril Ramaphosa urged the world's richest countries to help finance the World Health Organization's COVID-19 testing, diagnostics and vaccines programme. "If all G7 countries met their fair share target, this initiative would be two-thirds funded – and it would be 90% funded if all G20 countries made their fair share contributions," Ramaphosa said.


A global rally in bonds has been good for South Africa's government bond market. On Monday the yield on the benchmark 2030 issue, which moves inversely to its price, was just above a 3-1/2 month low at 8.675%. Stocks on the Johannesburg Stock Exchange (JSE) inched up on Monday in tandem with other global indexes but investors stayed cautious ahead of the U.S. Federal Reserve meeting this week to get a steer on inflation. The benchmark all-share index went up 0.32% to end at 67,941 points while the blue-chip index of top 40 companies ended up 0.34% at 61,654 points. Mining and commodity companies were a loser on the day when most of the sector indexes went up with the resources index closing down 0.29%.

 

Global Markets

Reuters: Asian shares had a mixed day on Tuesday and the dollar sat near multi-week highs ahead of a much-anticipated Federal Reserve policy meeting, which investors are watching for hints of any change to the U.S. monetary policy outlook. Japan’s Nikkei rose 1.05% and the Australian benchmark, traded up 0.93%, but Chinese blue chips fell 0.97%. This left MSCI’s broadest index of Asia-Pacific shares outside Japan trading flat. China’s markets were closed on Monday for a holiday, meaning this was their first response to a joint statement by the Group of Seven leaders that had scolded Beijing over a range of issues which China called a gross interference in the country’s internal affairs.


However, futures indicated European and U.S. markets were set to open higher. U.S. stock futures rose 0.16%, Euro Stoxx 50 futures were up 0.39% and FTSE futures were up 0.31%. “We are still getting markets responding positively to the lower volatility in the bond markets and lower yields, and a sense that inflation will be reasonably temporary so the Fed won’t have to slam the breaks on,” said Kyle Rodda, market analyst at brokerage IG. “I suspect in the next 24-48 hours we’ll see a lot of chop, first on the upside, then a little correction as the market positions itself, and then we’re off to the races if we get the green light from the Fed Thursday morning,” Rodda added. The two-day meeting starts on Tuesday, with a final statement published after the meeting closes on Wednesday.


Traders around the world are looking for any hints about whether and when the Fed plans to taper its bond buying programme, amid concerns from some quarters about inflation as the U.S. economy bounces back from the pandemic fallout. “Now domestic Chinese investors are increasingly aware of the global picture. Ten years ago they paid no attention to the Fed chair’s rhetoric, but today it is really a key issue,” said Qi Wang CEO of asset manager MegaTrust Investment (HK). Nearly 60% of economists in a Reuters poll expect a taper announcement will come in the next quarter, despite a patchy recovery in the job market. “Whilst no immediate changes in monetary policy are anticipated, an increase in the share of FOMC members who think rates will need to increase in 2023 is expected,” analysts at ANZ wrote in a note to clients. “If three more members pencil in rate rises for 2023, that would tip the majority in favour of moving rates relatively soon,” they said.


In currency markets, the dollar was quiet holding onto its gains against major currencies. The dollar index was at 90.475, not far off the top of its recent range. Retail sales and industrial production data due later on Tuesday could spark some modest USD volatility, wrote analysts at CBA in a research note. In the face of the strong dollar, spot gold was down slightly at $1,862.21 per ounce. Benchmark 10-year yields were 1.4838%, little changed from Monday, when they rebounded from Friday’s three-month low. As for commodities, U.S. crude ticked up 0.38% to $71.15 a barrel. Brent crude rose to $73.15 per barrel as talks dragged on over the United States rejoining a nuclear agreement with Tehran suggesting any surge in supply from Iran is some time away. Even bitcoin was fairly quiet, fluctuating a little above $40,000. It rose on Sunday and Monday after Elon Musk said Tesla could resume accepting payment in the world’s largest cryptocurrency at some point in the future.

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