Daily Market Update 1st July 2016
OVERNIGHT NEWS
- UK:
- Boris Johnson pulled out of the race to be the next British prime minister after former Brexit ally Michael Gove turned on him when Johnson refused to offer the job of foreign secretary to George Osborne, the pro-Remain Chancellor, who will now compete for the job with Home Secretary Theresa May.
- The opposition Labour Party is also in turmoil. Jeremy Corbyn came under further fire after appearing to compare Israel’s government to the Islamic State at the start of an independent review into antisemitism within the party.
- Mark Carney said the Bank of England will probably have to loosen policy within months to deal with the fallout of the Brexit vote as he warned that there’s only so much he can do to protect the economy. The BOE will also continue its liquidity auctions for banks on a weekly, rather than monthly, basis and consider a “host of other measures.”
- The FT reported that Britain will send high-level trade missions to China, India, the U.S. and the Commonwealth as it preps to separate from the EU
- EU:
- S&P responded to the U.K.'s departure by cutting its rating of the EU's debt to AA from AA+, citing fiscal concerns once it loses one of its wealthiest members.
- ECB
- The ECB is making plans to keep stimulus flowing. It's weighing looser rules for its quantitative easing program to make sure it has enough bonds to buy. Policy makers are concerned the pool of eligible securities has shrunk as investors pile into the region's safest assets following the U.K. vote to leave the EU, pushing yields below the current criteria.
- MEXICO
- Banco de Mexico increased the overnight rate 50 bps, more than expected, to 4.25% (Exp. 4.00%), saying that while the nation’s growth outlook has deteriorated, worsened global economic conditions could impact prices. Officials said “With this action, the board looks to keep the drop in the peso in recent months and the adjustments in some relative prices from translating into an uprooting of expectations for inflation in our country,"
FOREIGN EXCHANGE (INDICATIVE RATES)
| Currency | Last | % Change | Overnight Range |
|---|---|---|---|
| DXY | 96.14 | -0.01% | 95.443 – 96.417 |
| EURUSD | 1.1096 | 0.14% | 1.1024 – 1.1155 |
| USDJPY | 103.21 | 0.65% | 102.36 - 103.39 |
| AUDUSD | 0.7449 | 0.26% | 0.7372 – 0.7463 |
| GBPUSD | 1.3294 | -0.64% | 1.3206 - 1.3496 |
(Source: FabTrader)
Commodities (INDICATIVE RATES)
| Currency | Price USD | % Change | Overnight Range |
|---|---|---|---|
| Gold | 1325.99 | 0.45% | 1312.95 - 1323.14 |
| Silver | 18.72 | 2.68% | 18.195 - 18.7135 |
| Oil (BRENT) | 49.71 | 1.86% | 49.83 – 51.02 |
| Oil (WTI) | 48.46 | 2.38% | 48.17 – 49.6 |
(Source: Bloomberg and Saxo)
COMMODITIES
Precious Metals: Silver continues to surge higher and closed at its year high at 18.3. 18 dollar was a key resistance turned support level that was tested in May. Gold remains well supported above the support level at 1300
Oil: Crude stockpiles dropped 4.05 million barrels last week, the 6th straight decline and output fell a 3rd week to the lowest. WTI fell as much as 61cents to 49.27 before it settles at 49.88, the highest since June 23.
FOREX NEWS
GBP started to rally after the decision of Boris Johnson to withdraw from the PM race but dropped quickly after when BOE announced the central bank may need to loosen the monetary policy after the Brexit vote. The drop was just an initial reaction of Carney’s comments but not really a surprise and GBP closed in mid-range. It seems that 1.3500 is becoming a short term resistance
USDJPY continues to squeeze higher and it happened during the Fixing time in Europe, most probably coming from a Corporate month end flow. 103.50 was the main level to watch before the fall after the Brexit vote. We have noticed that Japanese banks like to sell USDJPY during the Asian session but it stopped moving lower because NY keeps buying so we could have a bigger squeeze higher soon
Commodities currencies continue to trade well overall
EM was again the beneficiary of the USD selling, with USDMXN dropping 2% on the more than expected rate hike. USDSGD continues to give headaches to Funds who have been buying Vols as a proxy of Risk off and continues to trade below 1.3500
Sterling pressured by BOE easing views, euro wobbly
Sterling stayed on the defensive on Friday after unambiguously dovish comments from the Bank of England abruptly ended a tentative recovery in the currency, while the euro wobbled on speculation of more stimulus in Europe.
Still trying to get over last week's decision by voters to leave the European Union, the pound quickly crumbled towards a 31-year trough after BOE Governor Mark Carney said more stimulus would probably be needed over the summer.
Sterling shed about two cents towards $1.3200 GBP=D4, bringing back in view Monday's trough of $1.3122. It has since found an uneasy truce just around $1.3340, about 0.2 percent above late U.S. levels.
"Carney set up at least one rate cut," analysts at ANZ wrote in a note to clients, adding the market is fully priced for an easing by August.
The euro hit a fresh 2-1/2 year high of 83.845 pence EURGBP=D4, and last stood at 83.30.
Against the yen, sterling skidded to 137.25 GBPJPY=R, but held off a 3-1/2 year low of 133.65 set last Friday.
Traders said sterling is likely to remain choppy given the uncertainty surrounding the country's future outside of the EU.
The euro also came under a bit of pressure overnight, retreating from a one-week high of $1.1154 to as far as $1.1023. It last stood at $1.1105 EUR=.
Traders noted a Bloomberg report that the European Central Bank was thinking about looser rules for its quantitative easing program had knocked the currency lower.
In addition, the market is also expecting the ECB to dole out stimulus eventually to support the flagging European economy.
"It's been said that the euro zone is vulnerable to Brexit after the UK but the euro hasn't fallen much perhaps because the impact is not just clear yet," said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.
"But when you consider, the euro zone will have to take the brunt of rise in sterling so the economy will likely suffer. The market will probably start to price that in when things become clearer," he said.
In Asia, economic data from the world's second- and third- biggest economies was far from assuring, although currencies showed limited reactions.
Growth in China's manufacturing sector stalled in June, an official survey showed, while a separate private survey focusing more on small and mid-size firms showed activity shrank more than expected.
The Australian dollar, often used as a proxy for China trade, stood flat at $0.7458 AUD=D4, having rebounded from last Friday's low of $0.7305.
The Bank of Japan's tankan corporate sentiment survey, largely conducted before the Brexit vote, showed the mood among the service sectors worsened, while a fall in core consumer prices deepened.
The yen slipped to as low as 103.40 to the dollar JPY= in early trade, extending its slide on the back of gradual recovery in risk appetite but it has bounced back to 102.83.
"The BOJ will be in focus this month. Today's data isn't strong. Whether the BOJ will ease or not, markets will likely to price in easing expectations," said Kyosuke Suzuki, director of foreign exchange at Societe Generale in Tokyo. (Source: reuters.com)
