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Morning Brief – Wednesday 31th

Porcupine Pound:

 

It was apparent as of market open this morning that the Pound had managed to secure a stronger footing. Stemming largely from a mild improvement in Brexit sentiment, the Pound soon recovered off of its 1.2701 lows against the US Dollar, even breaking through 1.13 against the Euro on two occasions this afternoon. Overnight reports that the vice President of the Commission had guaranteed European institutions access to UK clearing facilities supported the domestic currency and the Euro at market open. The subsequent news that saw the Pound appreciate by around 0.95%, released at 15:27 this afternoon, contained rumours that a post-secession trading deal with the European Union may come as soon as 21st November. The news, which stemmed from a letter written by UK Brexit Secretary, Dominic Raab, got markets momentarily hot under the collar. As the shock reaction slowed, traders’ cold feet returned with the Pound stabilising at a more modest 0.5% gain on the day, on a trade-weighted basis. With an interest rate decision tomorrow at the Bank of England, investors are keeping a wary eye on the words and actions of Governor Mark Carney. Following Chancellor Hammond’s budget speech on Monday afternoon and the promise of increased spending, there could be scope for the Bank to strike a more hawkish tone. However, given the uncertainty of Brexit, a November 2017 style reaction could ensue with investors rewarding the Pound with less value despite higher rewards for domestic investment due to the irresponsibility of the monetary authority in the face of Brexit. Month end balancing flows saw the US Dollar gain significant value with mid-term elections now only one week away. Today’s trading within the Dollar was anticipated to be choppy with necessary flows from passive funds across the globe creating additional and idiosyncratic demand for the greenback. The Rand suffered, getting dragged down by a weakening emerging market sell-off. Yesterday’s weaker Euro was also sustained throughout today’s session as Italian deputy Prime Minister Salvini announced Italy’s budget wasn’t going to budge! With the Commission refusing to accept Italy’s incumbent budget proposal, European risk sentiment continued to sour.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 30th

Out for a penny, out for the Pound:

 

The Pound faced another day of horrors losing as much one half of one percent on a trade weighted basis versus its peers. Following the most generous budget for 10 years, investors have confirmed their sentiment that Brexit is all that matters now. With the deadline to officially leave the European Union, whether following a transitional deal or hard break, less than five months away, the Pound’s misery and sell-off is unsurprising. The Dollar has managed to secure a mildly stronger footing today, closing the day’s European trading more than 0.1% stronger. The trade weighted Dollar Spot Index is once again approaching a value of 97, creating a technically challenging double peak that could generate a headwind for the greenback’s appreciation. With mid-term elections in the United States swinging towards the Democratic Party, traders are growing increasingly concerned about the propensity for Trump’s damaging rhetoric to rear its head. Cuts to taxation have already supported the Dollar by raising the expectations for further rate hikes because increased spending and consumption should be thought to add to inflationary pressures. Over the past few days the Rand has appeared to decouple from its traditional negative correlation with the Dollar. The destabilisation of the traditionally strong and negative correlation is likely due to the anticipation of Moody’s forthcoming rating on South African debt. Given Moody’s negative guidance following Nene’s medium-term budget policy statement last week, there is considerable risk priced into Rand crosses.

 

Discussion and Analysis by Charles Porter

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Daily Brief – Monday 29th

Not such a budget Budget!

 

The Chancellor delivered his budget speech this afternoon to the House of Commons. The event, as expected, received little market fall out as investors largely disregarded the spending promises given the political tumult caused by Brexit. Nevertheless, the news was positive: upgraded growth forecasts from the Office for Budget Responsibility; higher spending across the board; significant movements in taxation thresholds; and new treasury revenue streams. Despite the largely positive announcements backing up May’s Conservative Party Conference pledge to end the decade long commitment to fiscal austerity, Sterling failed to catch a bid, dropping through 1.28 against the Dollar mid-speech. In Germany this morning, a surprise announcement that Chancellor Merkel will step down as CDU leader caused a strong and sudden sell-off in the Euro. Adding to extant political risk within the Eurozone, Merkel also announced that her time in front-line politics is over when her present term in the Bundestag ends in 2021. Given that Merkel’s four term-strong Chancellorship has been a flagship of stability for the Eurozone’s most significant economy, the news was met with a considerable uptick in net short positions against the European single currency. However, as markets came to learn that Merkel intended to see out her term, only relinquishing the premiership of her Christian Democratic Union and not the Chancellorship of Germany, the Euro did gain some footing to re-test 1.14 against the Dollar. With mid-term elections in the US taking place next week, the Dollar managed to add to its already elevated value, trading more than 0.5% stronger on the day. Core personal consumption expenditure in the US was read today for the month of September, coming in perfectly in line with consensus forecasts, at 2%, equal to last month’s reading. The Dollar had been under pressure over the weekend as a combination of stock market jitters and Trump’s condemnation of the Fed’s tightening cycle led traders to begin pricing out the probability of a December rate hike late in Friday’s evening session. However, by avoiding the scathing criticism of Brexit and the crisis in Italy, the greenback secured good demand as its domestic interest rate expectations were restored.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 26th

Clarida’s Confessions:

 

The Dollar continued its rampant appreciation this morning following the testimony of the Federal Reserve’s Vice Chairman, Richard Clarida. In the first major speech of his appointment, the American economist sided with further US monetary policy tightening. The Vice Chair did not appear concerned by equity market evolutions in the previous weeks despite the aggressive admonitions and deriding comments by President Trump. The Chair and Vice Chair of the Fed appear to be wholly aligned, paving the way towards less accommodative monetary policy that promises to afford the Dollar greater value. The Vice Chair also followed his premier Jay Powell in distancing the Federal Reserve from politics and the White House maintaining that the Fed’s only “job is to sustain what is a very healthy and robust economy”. US Gross Domestic Product data released this afternoon for the third quarter of 2018 surprised to the upside. The recording came in at an annualised 3.5% versus consensus expectations of 3.3%. The reading did, however, still underwhelm the previous figure of 4.2% growth. The data is also used to produce a GDP deflator, a proxy or alternative statistic for the more popular measure of inflation, the Consumer Price Index. This figure surprised to the downside, underwhelming market expectations by a whole 0.4%, causing a sell off in the Dollar throughout the afternoon. Given the principal and superior importance of inflation to monetary instruments and interest rates, this statistic overwhelmed the market effect of the more popular growth measure. Cable recovered from lows of 1.2775 to comfortably trade within the 1.28s at market close. The Euro was also able to recover pivotal ground above 1.14, surpassing important resistance.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 25th

Elephant in the Room:

 

The European Central Bank published its latest monetary policy decision today, with the European monetary authority leaving interest rates unchanged. The Bank held the main refinancing rate at 0% with the deposit rate, the reward for holding funds at the bank overnight, at -0.40. The ultra-accommodative monetary policy stance is nothing new, with markets understanding the intentions of arch-dove President Draghi for a long time. Guidance was held to leave markets anticipating the first interest rate hike, the first of Draghi’s 8-year presidency, after the summer of 2019. The Euro gained significant value, following a shaky morning session, throughout the early afternoon despite the continued dovish tilt to monetary policy simply because the Bank did not place weight on the risk that Italy brings to the single currency and Union growth forecasts. Despite numerous press conference questions enticing Draghi to condemn Italy’s budget plan, the President held firm suggesting that the spending plan was a matter of fiscal governance and of little to no consequence to the broad-based growth and monetary progress within the Eurozone. With a lack of positive Brexit news today, the Pound continued to stall, succumbing to the pressure of the US Dollar as cable began to test 1.28. Following an appalling day for the Rand yesterday, South Africa’s currency retraced slightly to close around one quarter of one percent stronger on the day on a trade weighted basis.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 24th

Auspicious Start…

 

The Rand has lost close to 1% on a trade weighted basis today alone. The depreciation of the South African currency has occurred despite the intraday appreciation of the broader basket of emerging market currencies. Presenting the mid-term budget statement, South Africa’s new Finance Minister, Tito Mboweni, announced that South Africa’s fiscal deficit has not yet peaked. Instead, borrowing to finance the deficit within Africa’s largest economy will continue to grow for at least two years before the deficit begins to fall. The major depreciation of the Rand only a few weeks ago, spurred by Turkey’s domestic currency crisis, was caused by the overwhelming size of its twin deficit (the dual occurrence of current account and fiscal deficits). In reaction to the news of sustained fiscal irresponsibility, bond yields rose whilst the currency fell, as traders scrambled to price in the increased risk within the Rand. Moody’s is at present the only ratings agency to hold South African debt denominated in Rand within the ‘investment’ grade. Should the asset fall from the classification and drift into junk it will prompt the liquidation of many holdings largely held abroad, beginning a considerable sell off in the Rand. Limited progress on Brexit and shaky grounding for Theresa May continues to hinder the Pound. Sterling has failed to catch a bid amidst reports of a frosty cabinet meeting yesterday. Chancellor Hammond will deliver his budget speech next week with investors keeping a wary eye on whether he will be able to honour May’s claim at the Conservative Party conference that austerity is over. With the Commission rejecting Italy’s budget, Guiseppe Conte’s coalition government has only three weeks to return with a plan B which, at present, supposedly doesn’t exist. With the Euro dropping off considerably today and falling into the 1.13s for the second time this year, the Euro trades at a considerable discount to other major currencies. The Dollar continues to hold on to its elevated value amidst the Euro and Pound’s turmoil despite Trump’s continued attack on the Fed and its Governor Jay Powell. With mid-term US elections around the corner, promises of fiscal stimulus have underpinned the greenback.

 

 

  • GBP: Domestic political uncertainty and a lack of confidence in Theresa May weighs on the Pound. GBPUSD drops below 1.29 as May’s position is challenged for at least the third time.

 

  • EUR: Italy’s proposed budget is rejected by the Commission with BTP spreads hitting a 5-year high.

 

  • ZAR: South Africa’s new Finance Minister has a shaky start, tanking the domestic currency by near-on 1%.  

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 23rd

48%; 52%; 95%!

 

European Integration has progressed at a minimum of two different and distinct paces since 1992 and the signing of the Maastricht Treaty. Those travelling at the first place, the most advanced threshold of integration within the union, is populated by member states participating in the shared currency, operating under an enhanced set of rules of mutually held sovereignty. The latter pursue only the four freedoms (goods, capital, services and labour) at a more leisurely pace, with many frequently finding this challenging!

 

Italy’s membership within the former group makes the significance of fiscal irresponsibility all the more worrisome for markets. The set of shared rules that Italy adheres to by virtue of its enhanced commitment to European integration means that the EU Commission has the power to issue negative guidance on their extant budget proposal, forcing the domestic government to reformulate and resubmit its proposal. Should the discord continue further, the Union could even demand a 0.5% of GDP fee from Italy. The substantial pecuniary punishments to Italy are justified upon ground of Union integrity and provided for within Fiscal Compact’s excessive deficit and excessive imbalance procedures under the watchful eye of the Commission. However unlikely the implementation of these sanctions and fines may be, given that the present debate is about 2.4% fiscal spending caps, 0.5% is a whole heap of cash Italy still doesn’t have. If the EU were to enact these procedures to the detriment of Italy, Union stability as well as idiosyncratic Italian risks would soar.

 

Sterling was undermined yesterday amidst weak European risk sentiment, with investors’ turning instead to the Dollar and later in the day, the Japanese Yen. Despite it still being clear that domestic and European sticking points are focussed around the Irish border, May still claimed yesterday that 95% of the exit plan was agreed; in Brexit, it’s all or nothing! Despite yesterday’s sell off in the Pound, there remained areas of idiosyncratic optimism. Hammond’s budget next week, for example, attracted favourable musings of sustainable yet pragmatic gearings. Given relief from domestic political pressures and Brexit, it is likely that the Pound could surprise to the upside.

 

 

  • GBP:   Reports that the EU will offer the UK at large a comprehensive customs agreement sends the Pound higher.
  • EUR:   Italy is in focus as the European Parliament convenes in Strasbourg.
  • USD:  The Dollar catches a bid on the back of defensive Dollar demand and dwindling European risk sentiment, capping this morning’s GBPUSD below 1.30 and EURUSD below 1.15.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 22nd

Playground squabbles

 

The Dollar is on the rise with the Pound and the Euro feeling the pressure of increased political uncertainty. The Dollar’s early bid of the week stems from the White House’s suggestion over the weekend that arms treaties with Russia should be suspended. Amidst an incumbent crisis in Saudi Arabia, the elevated political tension adds to already significant defensive dollar demand and investors’ appetites for safe haven assets including gold, the Japanese Yen and CHF. Despite government borrowing figures in the UK coming in significantly below consensus and recording the lowest borrowing volumes for September in 11 years, the Pound has failed to sustain its valuation as of Friday’s market close. Following appearances from Brexit Secretary Dominic Raab over the weekend and rumours that May could be willing to break certain Brexit red lines in order to achieve a deal, markets are left waiting for more concrete news. May is due to address parliament later today in an event that could promise to take centre stage. By all accounts, announcement of a deal should be supposed to produce significant fallout within cable with technical analysis suggesting the pair could reach as high as 1.40. EURGBP, however, is likely to be more contained with channel trading to be broken adding conviction to the implausibility of parity. The correlation of Italian yields and the Euro has risen to a 5 year high with intense debate between European institutions and Italy yielding little progress so far. The ECB will host a press conference following its monetary policy decision on Thursday. European Bank President Draghi has already mentioned in previous weeks of the broad risks to growth within the Eurozone economy. Market reaction should be significant if the Bank acknowledges Italy as yet another risk to shaky growth.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 19th

Sorry, come again?

 

Trouble throughout the Eurozone, the United States and the UK makes for interesting trading within the world’s most popularly traded currency pairs. Marked by a spike in the VIX, a volatility index traded on the Chicago Board of Options Exchange, which currently carries a 19 handle, price movements across the board have become more exaggerated, sudden and severe.

 

Continued trouble in Italy has pushed yields on a generic 10 year government bond above 3.50 (3.78 at the time of writing); a price that we have not seen associated with Italian debt for the past four years since the climax of the European Sovereign Debt Crisis. Following the European Council’s summit, Italy’s budget proposal remains in the foreground of investors’ minds. Following verbal admonitions from the EU budget Commissioner and even the European Central Bank president himself, the populist coalition government made up of domestic ‘league’ and ‘five star movement’ parties looks to be in trouble.

 

With a lack of momentum behind Brexit both abroad and at home following the Brussels summit, investors are left to only price in yet another delay in a final deal and a short and unconfirmed extension of the transition period. Given the rapidly approaching March 29th 2019 deadline, it is apparent that traders have looked upon the Pound with relatively sanguine eyes in the face of yet another set back. In cable, 1.3250 attracted considerable resistance and selling pressure has been unable to shift GBPEUR, still carving a narrow channel, banked by 1.10 and 1.16.

 

In the United States, the Federal Reserve Bank is under attack but surviving well. Taking scathing criticism from the White House and even its own constituent bankers, the question continues to echo, ‘how long can we tighten rates for?’. The Reserve, in its latest September minutes, removed all reference to incumbent rate policy as ‘accommodative’. There was little fallout from the exclusion within markets given the elevated rates that the US economy presently awards investors and the tenuous link to future policy given the retrospective nature of the change. The Dollar remained bid following the release of minutes with market participants unable to warrant shedding US Dollar based assets given the unparalleled reward the greenback holds.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 18th

Sorry, come again?

 

Finally, things become a little clearer on the progress of the European Council Summit in Brussels. Or do they? One of the most popular reports emanating from the seismic event in the Belgian capital purports that German Chancellor, Angela Merkel, found British Prime Minister Theresa May’s speech so unsure and nervous that she was unable to understand the UK’s premier. Speaking after the dinner, the Chancellor is supposed to have requested the assistance of the EU’s chief negotiator Michel Barnier to explain to her exactly what had happened. Speaking to the cameras also, May appeared flustered and confused, rattling off ill-formed sentences as fast as her tongue would carry her. Sterling took a battering during the decision, dropping down from session highs of 1.14 against the Euro. The Euro fared poorly overnight and throughout the morning before finding a footing during the European afternoon session. Despite not taking centre stage at the summit over the past few days, EU Commissioner Gunther Oettinger did address Italy’s budget proposal, noting that it was not in line with EU regulations and guidelines. The fallout from Commissioner for Budget and Human Resources’ words saw a marked spike in Italian yields with spill over headwinds in the European single currency. With Union solidarity during today’s summit press conferences, the Euro was able to gain ground despite being capped below 1.15 against the US Dollar. The Dollar itself caught a bid as tensions soured between Saudi Arabia and the United States, with US Treasury Secretary Steven Mnuchin confirming that he won’t be participating in the forthcoming investment summit in the Middle Eastern state. The Rand had fared well in recent days, catching a bid by consequence of a rapidly appreciating Turkish Lira and concomitant emerging market rally. However, the South African Rand was unable to sustain these gains amidst broad based Dollar strength.

 

To any and all of you attending this evening’s card launch event, we greatly look forward to welcoming you shortly.

 

 

Discussion and Analysis by Charles Porter

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