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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