St Mary Axe view

Morning Brief – Friday 28th

Inside the Hourglass,

 

Sovereign states must increasingly feel as though their countries are built upon the bedrock of the sand in a rapidly shrinking hourglass; assuming a position in an ever-collapsing pool, occasionally colliding with each other and frequently going under. Today was the turn of Euro to take a turn for the worse. Markets reacted badly to Italy’s delay in publishing their fiscal spending plan yesterday. Selling Italian assets instruments in their billions, equity markets tumbled with bond yields hitting fresh highs. The Euro was also hampered by the perceived political risk within Italy, allowing the value of the Euro against the Dollar to fall through 1.17. With the announcement that the budget deficit will now only be curtailed to 2.4% (instead of a promised 1.9%), the Euro lost further value with a loss of value equivalent to 1.84% in 48 hours. The revised fiscal expansion by the newly formed coalition suggested to markets that the more dominant League party was succumbing to populist pressure rebelling against the Eurozone’s bias towards austerity and fiscal responsibility. With EURUSD breaking below 1.16 once again, the value of 1 Pound against the Dollar also dropped bearishly towards 1.3000. Considerable resistance was found at this level, forcing a sharp and immediate devaluation of the US Dollar. For now, the drama in Italy still appears largely contained within the borders of the Mediterranean, stopping short of the rest of mainland Europe. This is apparent whilst domestic bonds rally and the stock market loses as much as 4% on the day. However, the risk of contagion cannot be continually underplayed as it was post-Brexit. If Italy falls in either direction, it could still spell disaster for the Eurozone.

 

 

  • GBP:   Readings of finalised second quarter economic growth confirm expansion in the domestic economy, Sterling fails to catch a bid amidst market wide volatility.  

 

  • EUR:   A change of heart leaves the Euro scratched and Italy wounded. Secessionist sentiment doesn’t have to be exposed at the ballot box, the situation in Italy could raise its head at any point.

 

  • USD:   Discovering resistance at 1.30 against the Pound, the Dollar takes a set back to lose 25 basis points on the day.

 

  • EM:    Emerging markets have traded on a leash against the Dollar today, reacting adversely to any swing in the greenback.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 27th

Stumbling Block,

 

In a surprising day for markets, the Euro is the major mover. Markets paid enormous interest to the Italian budgetary negotiations within their newly formed domestic coalition. With the dominating ‘League’ party, the composition of spending was almost entirely up for grabs, with secessionist sentiment surrounding the entire debacle. However, with numerous promises from finance ministers and party leaders alike that the government will not exceed a 1.9% running deficit, markets were placated, affording fair value to the Euro. However, today, this has all been dragged into question with the publication and delivery of spending plans delayed without sufficient explanation. Markets are questioning why this has happened and, in so doing, have allowed the Euro to depreciate to lows of 1.1215 against the Pound and fall through 1.17 against an approaching Dollar. On a trade weighted basis, the Euro faces one of its worst intraday sell offs this year. The Pound has struggled to find footing once again as buy the rumour sell the news trading continues to create noise within all major currency crosses. The churning of the rumour mill today surrounded the UK fiscal budget and the potential actions of Chancellor Hammond in his premature 29th October budget. With potential Judge Kavanaugh facing testimony in Washington today, the Dollar remains bid, however, with considerable political risk all around.

 

 

 

  • GBP:   Buy the Rumour sell the News! Sterling continues to face the doldrums with uncertain political direction. An early budget has investors worried.

 

  • EUR:   Staggering losses for the Euro as Italy delays its budget announcement with as lack of certainty as to why. Markets price out the sustainability of Italy’s fiscal outlook.

 

  • USD:   Deliberations over the suitability of Kavanaugh to the incumbent administration are underway with harrowing testimonies no affecting the Dollar; yet. Dollar demand continues, supported by flagging Euro support, however, tomorrow is another worrying day for the greenback.

 

  • EM:    A risk on mood within markets supports emerging assets and currencies. The Rand rallies as the South African administration continues to view the domestic economy as severely undervalued.  

 

 

Discussion and Analysis by Charles Porter

 

 

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SGM-FX View of london

Morning Brief – Wednesday 26th

The Sterling continued to extend its consolidation through the European session yesterday. Once again, the US session looked upon our domestic pressure with less sanguine eyes, succumbing to political uncertainty amidst staunch Commons conflict and even intra-party disputes. Speaking once again later today in Washington, May could provide the market with hope for the other side of a trade deal: someone else to trade with! Sterling still sits within its medium-term channel and this afternoon’s speech has virtually zero probability of changing this, moreover, up and down side risks seem moderate and contained moving into the event. Italy continues to promise a running public deficit of 1.9% of GDP. This conviction continues to support Italian and Eurozone debt yields and is helping to curb Euro selling. However, the recipe for a 1.9% deficit still needs to be spelled out to markets to check that the actuaries carried the one! With a Federal Open Market Committee interest rate decision this afternoon, the Dollar remains bid. Futures markets price a 25bps hike this afternoon at a level above the 90th percentile, suggesting close attention will be paid to forward guidance and subsequent committee discussions as well as the all-important dot plot.

 

 

  • GBP:   Prime Minister May joins the UN Security Council this afternoon, with important opportunities to discuss post Brexit trade.

 

  • EUR:   With Italy behaving for now, traders’ thoughts continue to trade Euro stability against Dollar attraction.

 

  • USD:   FOMC decision day: A hike is priced in completely, but markets get their first look at members’ expectations for 2021 monetary policy.

 

  • EM:    Heads down, don’t make any noise! Emerging markets survive well on an important Dollar day.

 

 

Pound Sterling:

 

Speak, Don’t Dance:

 

Sterling is flat this morning, losing only a handful of basis points back to its counterparts. The move is unlikely to represent market positioning ahead of May’s discussions in New York this afternoon. Instead, the moderate aversion to the pound this morning is indicative of uncertainty following two consecutive days of rising yields and a pound that has gained cost to 1%. Moreover, the Pound, much as the Euro, faces a headwind as investors consider the alpha potential of Sterling when the greenback is soon to yield 2.25% neutral interest. May’s speech this afternoon is expected to have followed trade talks with President Trump. The two should meet together in New York today whilst the UN general assembly convenes. Balanced upside and downside risk encompasses the event, with price action constrained by the supposed and assumed inability to invoke or sign a trade deal during the Article 50 process.

 

 

The Euro:

 

Would the real Mario Draghi please stand up:

 

Monday brought great fortune to the Euro, spiking upon the most optimistic words that ECB president Mario Draghi has uttered in years. Speaking to the European Parliament in Brussels, the typically dovish Central Bank Governor signalled forwards to rising price inflation amidst a consistently tight labour market and strong economic growth. Traders immediately rushed into the new promise of the European single currency before being immediately doused with cold water by the President, who noted this development was still only consistent with a first rate hike at the end of summer 2019 and the end of the asset purchase programme this year. The Euro remains stable amidst consistent guidance remaining constrained below 1.18 against the Dollar.

 

 

 

The Dollar:

 

Rates Day:

 

The Dollar will be in centre stage during the latter half of the New York session this afternoon whilst the Federal Reserve publishes its latest interest rate decision. Markets priced in approximately 93% of a 25-basis point hike at market open this morning. With yields on a generic ten-year government notes rising by as much as 0.5% to trade at 3.08 at the time of writing, there is potential for considerable Dollar movement this afternoon. With such a high probability attributed to the event and with such explicit forward guidance from the US central bank, the fallout from the announcement is likely to be limited. What will move markets considerably is the fresh observation of the dot plot – the committee members’ anonymous expectations for the future path of monetary policy.

 

 

Emerging Markets:

 

Don’t look the Dollar Bull in the eye:

 

Emerging markets are enjoying the relief of a stable Dollar, however, could be in for a surprise should today’s US Federal reserve announcement heighten the probability for future monetary tightening. With the UN Security Council presently convened in New York at their global headquarters, emerging market currencies should also be wary of any unexpected movements in the United States’, and other security council members’, deviations from incumbent foreign policies. Deep breaths could be necessary for the Rand!

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

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Morning Brief – Friday 21st

Tainted Promises,

 

Salzburg provided sterling markets with ultimately intraday gains in excess of 0.5%; one of Sterling’s best performances in months. The developments were great enough to push cable (GBPUSD) to close to 1.33, rolling another month’s worth of losses from the currency pair, equal to a 1.15% intraday displacement in favour of the Pound. It was a classic “buy the rumour; sell the news” trade with the actual announcements of the informal EU Council summit underwhelming the speculation that had preceded it. The Euro continued to track the performance of the Pound with Brexit sentiment spilling over by the bucket load into the European single currency. With a lack of idiosyncratic movement yesterday, in a data light week, amidst domestic quietism, the Euro was mainly driven by the Pound, demonstrated by its relatively shallow displacement compared with GBPUSD in yesterday’s European session. However, when the rumour was over, and the news lay in solitude, the pair returned to parity as Euro support and Sterling fever cooled.

 

The Rand held firm, closing 1% above its opening value on a trade weighted basis as the Reserve Bank held its rates steady. The Dollar sold of yesterday with US Bond yield spiking to their highest levels in months. In a trade at odds with the incumbent high yield strong currency trade of post-March 2018, this could be the signal we need to suggest the Dollar’s twilight could be near.

 

 

Since Market Open:

 

  • GBP: Buy the rumour sell the news! The reality of idolised Salzburg negotiations leave investors and traders underwhelmed.

 

  • EUR: Revelling in the spiking probability of a post-Brexit trade deal, the Euro appreciates heavily before facing a headwind in the stark light of EU Council President, Donald Tusk.

 

  • USD: Mid-term elections still weigh on the greenback with interest rate differentials not enough to push investors into the Dollar with positive global risk sentiment abounding.

 

  • EM: HOLD! But only just. SARB holds rates at 6.5% with the Bank’s pragmatism being rewarded by traders and investors.

 

 

Pound Sterling:

 

Homage to Barry Chuckle:

 

Following the sad death of Barry Chuckle last month, Sterling paid a moving tribute to the joint star of ChuckleVision yesterday. In true “to-me; to-you” fashion, traders and investors backed the hyperbolic rumours emanating from Salzburg and the UK of a cracked Brexit arrangement. However, by the time that Council President Donald Tusk spoke on the progress of the informal summit, Sterling buyers were virtually nowhere to be seen! The President demarked the Chequers Agreement as an insult to the Single Market and at odds with it (according to all EU leaders) adding that its economics just don’t make sense. A few minutes later Mrs. May also declared that the UK does and will continue to work on a “no-deal” scenario. Salzburg had been framed as an opportunity to seal a deal for November. This announcement was made, with Tusk suggesting the members “can finalise Brexit talks in November”, however, it wasn’t the sepia toned concession fest that markets seems to price in throughout the morning. Hold your breath on Brexit once again!

 

 

The Euro:

 

Still Waiting:

 

The Euro continues to wait for some domestic momentum to its currency. With the first data release this week scheduled for tomorrow morning, volatility could return as estimations drift astray. IHS Markit will publish soft data tomorrow detailing purchasing managers’ impressions of the economy this month with an additional final domestic reading of French GDP by Eurostat. As the Euro’s value has been determined by the Dollar’s loss of ground and Brexit developments, tomorrow could reintroduce some idiosyncratic momentum to the Euro as valuations have drifted astray. Caution should also be taken from the perseverance of strength in the Euro following underwhelming Brexit hard news in comparison to the Pound.

 

 

The Dollar:

 

Don’t You (Forget About Me):

 

Simple Minds. And no, for once I’m not insulting the leader of the free world (normal service will be resumed on Monday), I instead refer to the hit pop song of 2001. Traders in particular appear to be dissatisfied with the interest rate differential between the US and the rest of the world that fails to keep up with the US’s tightening monetary policy. Losing value amidst improving global risk sentiment largely driven by Brexit developments, the Dollar traded down around a quarter of one percent at market close yesterday. An immense rally in Copper and Commodity markets yesterday also provides testament to the fact that the trade war has all but been forgotten also. Let’s not give the Simple Minded one reason to lash out and send global markets and global growth into disarray! (Damn it! Normal service resumed.)

 

 

Emerging Markets:

 

Walking on Egg Shells:

 

Yesterday, the South African Reserve Bank chose to hold the repurchase rate unchanged at 6.5% per annum. It should be well noted, however, that the monetary policy committee was heavily divided, with three members voting for a 25-basis point rate hike, versus only 4 members keeping them in check and rates on ice. The dynamics leading up to the decision were noteworthy, with commentators and analysts beginning to view a no-hike as harmful to the Rand even in the short run. With a technical recession in South Africa less than a couple of weeks old, a decision to raise rates was being forecast to be so harmful to the domestic economy that traders would have perceived less value in the Rand. The past few month’s FX story came through strongly in the minutes, however, optimism remains that growth could be spurred by the devalued Rand should political economic confidence be restored at a substantial level. Showing little change, the committee still foresees interest rates rising in South Africa, with 5 (25bpt) hikes predicted by the end of 2020. Rates are expected to follow the black line below with uncertainty bands imposed. Interpreting the future monetary landscape of South Africa therefore reveals a gradual tightening cycle with relatively balanced upside and downside divergences.

 

 

 

Discussion and Analysis by Charles Porter

 

 

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St Mary Axe view

Morning Brief – 20th September

All quiet in Austria,

 

Following a tumultuous day yesterday, Sterling this morning has had a directional purpose, currently trading around 30 basis points stronger on a trade weighted basis since its market open. The strong buying support is being driven by anticipation of progress at the informal EU summit in Salzburg, Austria, however, with little news emanating from the event, I’m afraid Mozart is probably still the most interesting thing to come out of the city that sits close to the German border. The Dollar continues to lose ground amidst an underwhelming trade war and with mid-term election risk beginning to creep into the forecasts of investors. The Rand, which faces an interest rate decision today, is taking advantage of persistent Dollar weakness, attempting to claw back to 19 versus the Pound and breaking through 14.50 against a weakening Dollar. The Euro also receives a bid this morning as Brexit sentiment also spills over into a stronger Euro.

 

 

Since Market Open:

  

  • GBP:   Salzburg remains quiet throughout dinner last night as investors pour hope into today’s continued negotiations.

 

  • EUR:   The Euro receives relief from positive Brexit sentiment as the front end of the Italian yield curve continues to rise, placing downward pressure on the single currency.

 

  • USD:   Mid-term elections draw ever closer with market beginning to price in the risk of newfound political paralysis from anti-Republican support.

 

  • EM:    Judgement Day: The South African Reserve Bank publishes its interest rate decision today with the Rand trading up 0.5% on the day.

 

 

Pound Sterling:

 

New Highs:

 

Sterling has confidently broken through the 1.32 mark against an ailing US Dollar as Brexit sentiment lifts the Pound dramatically. Sterling has now recovered all of the losses it made in August which were primarily driven by negative Brexit sentiment. The move has considerable conviction with EURGBP passing through the 38.2% resistance level and now sitting in parallel with the next significant hurdle of 0.885. It’s time for investors to consider the following: is the status of Brexit better now than it was in July? It’s a difficult question, however, the answer to this conundrum will likely produce the trading pattern of a Brexit neutral period. Whilst economic data looks good, there’s little reason to condemn Sterling back to its August lows, particularly against an ailing US Dollar.

 

The Euro:

 

Free Ride:

 

Yesterday’s tumultuous day in Brexit saw the Pound and Euro move in tandem with Brexit sentiment. Yesterday’s main events included the supposed rejection of Michel Barnier’s offer on the Irish border by Prime Minister May, strongly undermining the support of the Pound and the Euro. However, promises for flexibility and the circumventing of the European Commission (whom Mr. Barnier represents on behalf of the Council) thereby directly accessing heads of Member States that collectively produce the mandate for the lead negotiator, can allow Theresa May room to achieve progress. Consequently, Sterling and the Euro continue to trade in tandem this morning, receiving fresh relief from selling pressure (at the expense of the Dollar) with each rumour that escapes.

 

 

The Dollar:

 

Mid-Term:

 

Despite betting companies pricing the probability of President Trump’s impeachment close to 50% throughout 2017, the Donald remains at the helm of the White House. Continued heat from investigations swarms towards the President, however, never gets close enough to Burn the (in?)famous business celebrity. Despite the perseverance of Trump, his popularity has waned, particularly among certain interest groups (women in particular). It is unsurprising therefore that the Dollar continues to face a headwind as mid-term election expectations creep into analysts’ forecasts and investors’ decision making. The Dollar’s immense value is being questioned daily and it will be important to understand whether the progression is under scrutiny or whether 2018 Dollar strength has played out.

 

Emerging Markets:

 

Today’s the day:

 

The South African Reserve Bank, headed up by Lesetja Kganygo, will produce its monetary policy decision to the market and citizens today. The Bank is under considerable pressure to raise rates given the run on its domestic currency and its increasing inability to finance non-domestically denominated maturing debt. However, the economy is in a recession and domestic growth has been sub-standard for a considerable time throughout the latter months of political paralysis under Jacob Zuma and even now under the leadership of Cyril Ramaphosa. If South Africa raises rates heavily enough, the Rand will get a considerable boost, however, doing so could strangle the domestic economy creating greater medium-long run troubles for the Rand than a no-hike, or even cut.

 

 

 

Discussion and Analysis by Charles Porter

 

 

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Morning Brief – Wednesday 19th

Tariffs, Tariffs everywhere; but not a Dollar peak?!

 

$200Bn worth of goods at 10% levied against Chinese Exports to the US, including the proviso for this to raise to 25% next year, and now $60Bn worth of US exports to China will face 10% levies. Oh yeah, and the US sanctions on Iran come into effect in November with defensive rallies in Oil driving Brent crude up to over $80Pbl this month. The Dollar usually benefits considerably from defensive demand when perceived global risk increases because investors de-risk their portfolios and head to the ultimate sanctity of US treasuries: the safest asset within the (supposedly) safest economy. This is clearly not the case with the Dollar trading down considerably for the past two consecutive days. Inflation data has supported the Pound no end this morning, with unexpected inflationary pressures pushing the Consumer Price Index up to 2.7%. The Rand is benefitting from the Dollar’s weakness this morning and “Risk-On” move to markets. The Euro, a currency that has also sold off in the presence of a global trade war, also received a bid as markets change their mind about the trans-Pacific war.

 

Since Market Open:

  

  • GBP: 7% inflation beats estimates of 2.4% and previous recording of 2.5%. Giving traders an insight into tighter future monetary policies, the Pound spikes through 1.32 against the Dollar.

 

  • EUR: Recovering from an Italian yield spike that dragged the Euro down yesterday morning, the Euro trades up on the day as trade war risk is priced out and Brexit sentiment shines.

 

  • USD: Tariffs underwhelm expectations with 10% seen as insignificant to domestic and global growth, the Dollar slumped upon the release.

 

  • EM: The Rand and Lira enjoy a break as global risk stemming from a trade war facilitates an emerging market fight back.

 

 

Pound Sterling:

 

CPI wiped out:

 

Consumer Price Index data, the preferred measure of domestic inflation in the United Kingdom, was released at 09:30 this morning. The released attested to Year-on-Year inflation for august in the order of 2.7%, some 0.3% greater than consensus expectations and 0.2% stronger than July’s figure. The release saw Sterling rally some 0.4%, breaking through 1.32 against the Dollar. However, announcements delivered by Michel Barnier and messages emanating from Salzburg, undermined Brexit sentiment, causing the Pound to erode all of these gains and trade 0.06% weaker on the day versus market open.

 

 

The Euro:

 

Spill Over:

 

With little motivation of its own this week, with limited data releases or scheduled political economic events, the Euro trade has been caught between two factors: the trade war and Brexit. Since the beginning of 2018, $755.5Bn worth of levies and duties have been declared against Chinese exports into the US, with Chinese retaliation against the US affecting $229.9Bn worth of goods. Throughout each of these changes, the Euro has fared poorly upon fears of spill over into global growth. With an underwhelming retaliation from China yesterday evening following an equally mild sequence of Trumpian US aggression, the Euro had managed to gain ground. Following the concerns about a post-Brexit trade deal, however, the Euro has sold off, losing value to trade in negative territory on the day.

 

 

The Dollar:

 

Not Big Enough!

 

Something that I’m sure President Trump has heard many a time but rarely in relation to the amplitude of his foreign policy. 25% tariffs had been bandied back and forward between the US and China with hundreds of billions on the cards. This week, with 10% tariffs promised upon a total of $260Bn worth of respective exports, markets are pleasantly surprised by the restraint demonstrated by the two administrations on either side of the Pacific. The ultimate safe haven of the Dollar and US treasuries therefore lost some of their defensive demand, losing value across the board.

 

 

Emerging Markets:

 

T-24ish Hours:

 

The South African Reserve Bank will announce their monetary policy decision tomorrow. The decision and cause therein will likely frame the forward path of the Rand and domestic debt for the medium run and demonstrate the (privatised) Bank’s commitment to price level and FX stability. With emerging markets across the globe, from Turkey; to Argentina; to Russia, raising their interest rates aggressively to protect the domestic currency, pressure is mounting on South Africa to demonstrate similar commitment. However, with a statistical recession only a matter of weeks old, it is a testing time for Africa’s most significant economy.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

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SGM-FX View of london

Morning Brief – Tuesday 18th

Tariffs are so last week:

 

Sterling performed admirably yesterday amidst a risk-on feel. The Pound broke through important resistance barriers at 1.1250 against the Euro (EURGBP 0.888). Against the Dollar, the move was even more impressive, closing above 1.31 for the first time in one month. Across the board, Sterling hit 6-week highs yesterday, with cable trading 3.75% above its August lows and GBPEUR 2.5% stronger when coupled with an appreciating Euro. President Draghi speaks at a summit in Paris today with focus drawn to whether or not the European Central Bank governor will elaborate on the risk he foresees to global growth. The Dollar failed to catch a bid throughout New York and Asian trading sessions despite considerable tariffs raised upon $200BN worth of Chinese exports. Emerging markets paint a mixed picture this morning, staging a partial recovery from a small risk-off strategy in the Asian trading session.

 

 

  • GBP: Prospect of progress in Salzburg continued to drive the Pound higher despite Lagarde’s admonitions.

 

  • EUR: Bobbing through a quiet sea – could the ECB create a splash?

 

  • USD: The front end of the US yield curve continues to rise with markets beginning to question the longevity of monetary tightening and where a recession may be hiding.

 

  • EM: Two days to go until the SARB interest rate decision. The Rand holds its value despite a continued sell-off in the Lira and other emerging markets.

 

Pound Sterling:

 

IMF-Off…

 

… Said Sterling. The warnings of Christine Lagarde, Managing Director of the International Monetary Fund, were largely invisible within pricing of the Pound yesterday. In particular, Lagarde mentioned that the UK should do all that it can in order to avoid a “very costly, cliff-edge Brexit”. A no-deal Brexit possibility is highly important for the UK negotiating policy because it widens the perceived win-set of the UK, enhancing the probability of a more beneficial deal, better aligned with the UK’s best-case outcome. Therefore, it is unsurprising that the siding of Phillip Hammond, Chancellor of the Exchequer, with the admonitions of the IMF has been met with considerable back lash from Number 10 Downing Street. This position of the Chancellor has also been echoed by MPs in an open report published today, perhaps weakening the UK’s position heading into an EU Summit in Salzburg this week.

 

 

The Euro:

 

Austria and Germany to the Rescue:

 

Yesterday’s Brexit bid also supported the Euro. Reports suggesting that Austria and Germany are growing more determined in their conviction to avert a disturbing no-deal Brexit helped the Pound pick up momentum as week as the Euro. In Italy, yields on sovereign debt continued to fall as political economic risk was priced out of the domestic economy and, in turn, out of the single currency. It has been reported that Italy is likely to maintain its budget deficit at only 1.6% of GDP throughout 2019. This remains well below the European constraint of 3% and goes someway to ensure the fiscal sustainability of Italy in the long-run.

 

 

The Dollar:

 

Another Day another Tariff:

 

During the New York trading session yesterday, the White House announced that it would announce its next move in the trade war following market close. The decision Trump announced was to impose a 10% initial import tariff on Two Hundred Billion Dollars’ worth of Chinese exports. This 10% would then raise up to 25% at the end of this year to allow US economic agents to adjust to the prices. The initial reaction precipitated a risk-off move with the Yen rallying modestly and emerging markets losing ground against the Greenback. However, the move was muted, suggesting either markets’ ambivalence towards tariffs or suggesting that doomsday is already priced into foreign exchange markets. Positive risk sentiment has flooded markets throughout the later Asian session and the European open this morning as the informal Chinese response has been for conciliation and suggesting that it may be time to make concessions to support talks, step-down and resolution.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

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Morning Brief – Friday 14th

Tame; Light volatility; Grab a handrail:

 

Yesterday’s three interest rate decisions fell into place as predicted. A tame and uneventful Bank of England rate decision saw the Pound do little more than flutter. With a 9-0 vote within the Monetary Policy Committee and interest rates being held at 75 basis points, expectations were met in full. European growth forecasts were revised downward during the European Central Bank’s policy decision with Draghi maintaining that global risks remain balanced. Another hold of its main refinancing rate at 0.00% and a promise to end the asset purchasing (QE) program this year led to only a mild fall in the Euro. Leading up to the decision the Euro traded around 10 basis points shy of its value at market open. In Turkey, things hit the fan. Following the misleading words Recep Erdogan, the Turkish central bank raised interest rates by 625 basis points to take the one-week repurchasing repo to 24%. The price action within the Lira had a considerable spill over throughout emerging markets, with the Rand trading as much as 1% stronger yesterday.

 

Since Market Open:

 

 

  • GBP: 9-0 no hike sees Sterling trade horizontally. Positive Brexit sentiment allowed Sterling to appreciate throughout the afternoon yesterday.

 

  • EUR: Growth forecasts for 2018 and 2019 are revised down as the picture for inflation remains optimistic with monetary preferences unchanged in Frankfurt.

 

  • USD: Improving risk sentiment continues to constrain defensive dollar demand as the greenback loses ground against the Euro (1.17) and the Pound.  

 

  • EM: Monetary policy action from Turkey’s central bank awards up to 4.5% of value back to the Lira. USDTRY briefly kisses 6 Lira to the Dollar where considerable resistance lies.

 

 

 

 

 

Pound Sterling:

 

Carney mounts the property ladder:

 

Having not had the opportunity to speak at a press conference following yesterday’s interest rate decision, Carney apparently couldn’t resist stick his oar where it’s not particularly wanted this morning! Speaking in front of silenced ministers, the Governor of the Bank warned that a no-deal Brexit would result in housing prices being 35% lower, ceteris paribus, within only three years. What’s more, Carney and his Bank of merry Monetary Policy Committee members could do nothing to support the domestic economy and currency. Sterling has caught a bid this morning perhaps reflecting the Governor’s suggestion that a Brexit executed to the letter of the Chequers agreement will cause the bank to revise growth forecasts upwards with tighter monetary policy on the horizon.

 

 

The Euro:

 

360 Vision:

 

Without wanting to gloat, but perfectly happy to give it a go, I hope at least someone out there took advantage of yesterday’s call to go short on the Euro! Well, it would have paid off if you did. A revision downward in European growth rates yesterday afternoon by the European Central Bank depressed the Euro. In the absence of great confidence from Mario Draghi that risks remain outside of the Euro, the European single currency could not gain traction. Affirmative action by the Turkish central bank to shore up losses in the domestic currency had a limited and net positive effect on the Euro. Focusing on the European economy’s path forward whilst keeping a mindful eye on emerging market risks and global growth, the ECB was forced to keep its wits about it and mindful eye all around.

 

 

The Dollar:

 

Flashing Red:

 

The US released salient price level data yesterday afternoon. Consumer price inflation data undermined the Dollar with annualised August prices coming in at 2.7% versus 2.9% previous reading and 2.8% consensus expectation. The stumble in inflation led market participants to questions the long run sustainability of Federal Reserve monetary policy tightening; the major driver of a strong 2018 Dollar. Employment figures did not disappoint as heavily as price inflation data, however, still came in below consensus forecast.

 

 

Emerging Markets:

 

TRY and drag me down:

 

An interest rate in double figures on a one-week repo rate is unsustainable with respect to growth and stability. It’s a clear signal of an economy in distress that needs to reward investors and traders with so much value that, despite the risk, they can’t help but invest in the domestic economy and currency. That’s what Turkey did yesterday, raising its rate to 24% in a last-ditch attempt. Weeks ago, we began to grow concerned over the correlation of the Rand to the basket of distressed basket of EM currencies; the Venezuelan Bolivar and the Turkish Lira to name but a couple. This correlation is not over. Despite a premium of risk admittedly priced into the Lira, Turkey continues to weigh on the South African currency. At present the correlation is considerable with a level of significance surpassing the 30% threshold.

 

 

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

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Morning Brief – Thursday 13th

 

Rate Decisions All Around:

 

The United Kingdom, the European Union and Turkey all have interest rate decisions today. The order of importance and excitement is likely to follow that direction; with Turkey facing a pivotal and future-defining moment and little expected to occur at the Bank of England. There remains risk around the Euro as global growth projections threaten to harm the space for monetary tightening within the European single currency. Markets will look for the diamond in the rough of Mario Draghi’s dulcet tones. The Lira trades weaker on the day with the Rand holding firm and 0.5% stronger intraday. The Rand succumbed first to weakness in the Lira precipitating a sell off within emerging markets. Should the Turkish central bank disappoint once again today, eyes will soon turn to the Rand.

 

 

  • GBP: The Bank of England Rate decision at midday today is expected to be a non-event, with no press conference scheduled afterwards and minutes expected to reveal little.

 

  • EUR: Global growth is in focus from the US trade war, cold feet in Europe could need Draghi to confirm that the ship is still on course for a Summer 2019 rate hike.

 

  • USD: Weakness in the Dollar yesterday came amidst an announcement that China and the US will entertain further trade talks.  

 

  • EM: Turkey stands before a precipice with the Rand praying it won’t fall.

 

 

Pound Sterling:

 

Decision One – Business as usual:

 

Despite an interest rate decision in only a few hours’ time, Sterling is trading casually with unexceptional risk behind it. Following a 25 basis point hike last month, there is a consensus that there remains zero likelihood of a hike or change to guidance today. The non-event is likely to occur given yesterday’s wage growth reading which showed wages picked up in July amidst a strengthening labour market. Pay still remains below the level of 2008, however, the mild up-tick in wage inflation will allow the Bank to justify last month’s decision and hold the forward guidance unchanged.

 

 

The Euro:

 

Decision Two – On the line?

 

The Euro has caught a bid in the past week following the passing of the risky Swedish elections and the growing promise of a UK post-Brexit trading relationship. However, markets will look towards Mario Draghi, ECB president, for confirmation that the Eurozone economy can still cope with the cessation of stimulus programmes this December, and a first rate hike in Summer 2019. Given the uncertainty still surrounding trade at the moment, there remains the strong possibility that Draghi will skirt around these issues, thereby not providing the clarity that the market needs to reward the Euro with value. My advice? Get short the Euro!

 

 

The Dollar:

 

Good news is Bad:

 

The US agrees to re-entertain talks with China to potentially improve the prospects for global growth, let alone US and Chinese growth. It may seem remarkable then, that the US Dollar shaved as much as 40 basis points off of its value upon receipt of the news. The reason is that defensive Dollar Demand lapses and the ultimate safehavens (US treasuries and the Dollar) lose some value. With the volatility of President Trump one of the world’s ultimate known unknowns, who knows how long the trade ceasefire will last.

 

 

Emerging Markets:

 

Decision Three – Take Cover:

 

President Erdogan has already caused the Turkish Lira to tank this morning ahead of today’s interest rate decision. Erdogan mentioned the forthcoming measures to stem currency devaluations and stuck by his desire to cut interest rates in order to promote growth. Markets are looking for dramatic rate hikes in order to stem the bleed of the Lira, however, with the borderline dictator taking yet more control over the Turkish economy, who knows what the central bank will get away with. Upon this news, the Lira fell 3% against the Dollar (at around 10:15AM), to re-break through 6.50. The Rand also unmistakably sold off by up to ten basis points in a direct correlation with the Turkish/Emerging Market Risk. Should the situation continue to develop throughout the afternoon, we might expect serious devaluations of the Rand by consequence. Eyes peeled, take cover!

 

 

 

Discussion and Analysis by Charles Porter

 

 

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Morning Brief – Wednesday 12th

Plain Sailing across the Channel:

 

This Brexit malarkey is a walk in the park! Well, that’s what the Secretary of State for Exiting the European Union, Dominic Raab MP, must be thinking! Largely coincidentally, since the departure of David Davis, news on Brexit has been overwhelmingly positive, providing a boost to Sterling: Barnier mentions a deal within 6-8 weeks; flexibility surrounding Irish Border proposals… And now, this morning, EU Commission President Jean-Claude Juncker says that he welcomes the UK Prime Minister’s Brexit proposals. Of little impact to markets yesterday, we also learned that Bank of England Governor, Dr. Mark Carney, will be staying at the Bank for an additional year, until 2020. With one day left until both the European Central Bank and the Bank of England publish their interest rate decisions, last minute positioning has been rife this morning. Interestingly, news of a potential merger between Commerzbank and Deutsche Bank saw the European single currency enjoy light support. Emerging markets remain flat this morning with short term support found across the board.

 

  • GBP:   The Irish Prime Minister reiterates Barnier’s comments that a deal may be possible in weeks. The Pound gains further traction as President Juncker also begins to thaw.

 

  • EUR:   Brexit hurdles yesterday certainly led to choppy Sterling trading conditions, however, somewhat more surprisingly, also hurt the extant rally in Italian yields, with the Euro falling mildly as a consequence.

 

  • USD:   Trade concerns: As Russian President Putin and his Chinese counterpart Xi met yesterday the Dollar saw a minor bid.

 

  • EM:    Flat lining: could the correction in emerging markets be temporary? Now is a pivotal time for technical signals.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

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