Home 2020 December

British pound slips in Brexit countdown, the Australian dollar rallies

Sterling was set to snap five weeks of gains with a slump on Friday, as leaders on both sides of Brexit trade talks sounded doubtful about finding a resolution, while the Australian dollar soared along with iron ore prices to hit a 2.5-year high.

The greenback was pinned near a two-and-a-half year low, with markets heavily short dollars as investors bet on better returns in other currencies as the pandemic recovery takes hold.

The euro rose to $1.2158 even after the European Central Bank expanded its bond buying scheme, given the move was widely expected. The central bank also lifted growth forecasts but lowered inflation projections for 2022.

Against a basket of currencies the dollar drifted lower to 90.662, which is barely a third of one percent above last week’s 31-month trough.

Moves in morning trade were modest, but enough to push the Australian and New Zealand dollars to new multi-year highs and keep the euro within range of last week’s two-and-a-half year high of $1.2177.

The yen rose 0.3% to 103.04 per dollar and the New Zealand dollar rose 0.1% to $0.7104.

The Australian dollar has broken past 75 U.S. cents for the first time since mid-2018 overnight as prices surged for Australia’s biggest export commodity, iron ore.

It last traded at $0.7547 and is set for a sixth consecutive weekly rise. Over that time, it has gained five cents, or 7% against the dollar.

The Australian dollar also hit a one-and-a-half year high of 78.58 yen and a six-month peak of A$1.6083 per euro overnight and even leapt against the yuan despite worsening trade tensions between China and Australia.

“With the iron ore price on a bull run, the Aussie is largely ignoring ‘bad’ news,” said Commonwealth Bank of Australia currency analyst Joe Capurso.
Final Countdown

Investors have until the weekend to make last-minute adjustments to their sterling positions as Brexit trade talks enter their final lap.

The pound slipped 0.8% overnight after British Prime Minister Boris Johnson said on Thursday there was “a strong possibility” Britain and the European Union would fail to strike a deal and it changed hands at $1.3306 in Asian morning trade.

The British pound has shed 1% so far this week as efforts to seal a trade deal with the EU before protections on some $1 trillion in annual trade expire at the end of the month have yielded little thus far.

Johnson and European Commission President Ursula von der Leyen, who has said talks are “difficult,” have set Sunday as the deadline for finding a way forward.

Sterling volatility gauges are soaring as markets expect a wild ride to the finish line.

One-week volatility is at a new eight-month high and the premium of puts to calls is near its highest since April as investors pay up for downside protection.

“There has been a greater tendency for more jittery sterling longs to hit the sell button, although (the) market view remains that a deal is slightly more likely than not,” said Stephen Innes, the Bangkok-based chief strategist at Axi

Dollar turns higher as U.S. stocks weaken

The dollar rose in choppy trading on Wednesday for a fourth straight session, as selling momentum eased with stocks under pressure, but positive vaccine news and prospects of more U.S. fiscal stimulus next year should keep pressure on the greenback.

In midday trading, the dollar gained 0.2% against a basket of currencies at 91.067. It reached an April 2018 low of 90.47 last Friday.

It hit session highs versus the yen and Swiss franc.

The euro, on the other hand, fell 0.2% to $1.2079 , but was still on track for an annual gain of nearly 8%, its largest since 2017.

“This move of dollar weakness is starting to run out of steam in the short run,” said Ranko Berich, head of market analysis at Monex Europe in London. “Euro/dollar is rejecting last week’s highs, for example.”

Riskier currencies, including the Australian and New Zealand dollars as well as the Chinese yuan, led gains against the dollar, but have come off their highs. Both the Aussie unit and Chinese currency hit 2-1/2-year peaks earlier.

The dollar’s downtrend, however, remained the pervasive sentiment.

With U.S. coronavirus cases exceeding 15 million on Tuesday, regulators moved a step closer to approving a COVID-19 vaccine, while Britain started inoculating people on Tuesday.

Investors are also tracking negotiations over U.S. coronavirus aid, with the Trump administration proposing a $916 billion package on Tuesday after congressional Democrats rejected a slimmer plan.

“The narrative that the market is working off for now is that there would be a reflationary environment in the United States with the additional stimulus,” Monex’s Berich said. “This environment overall is conducive to dollar weakness.”

The dollar’s losses overall have been most severe versus the euro in recent weeks as economic activity data suggested Europe is outperforming the United States.

German investor sentiment rose in December on expectations that vaccines against the coronavirus will boost the economic outlook, a survey showed this week.

RISING YUAN

The dollar dropped to 6.5198 yuan in onshore trading , its lowest since June 2018, putting the yuan up by more than 10% from its May lows, boosted by the softer dollar and steady inflows into Chinese stocks and bonds.

Sterling was volatile, up 0.2% against the dollar at $1.3379 before a Wednesday dinner between British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen in Brussels that is seen as a last-ditch attempt to salvage a Brexit trade deal.

“Bottomline, a Brexit trade deal is the likeliest outcome, although a complete collapse in talks cannot be ruled out,” said Monex’s Berich.

Rumblings in the money markets grew with swap markets indicating a growing demand for dollars heading into the end of the year. Three-month euro cross-currency basis swap spreads widened to minus 27 basis points, but were well below a March peak of nearly minus 90 basis points.

The Australian dollar rose to its highest since June 2018 against the greenback and was last up 0.6% at US$0.7451.

Dollar gains as selling takes a pause; downtrend is alive and well

The dollar edged higher on Tuesday in choppy trading, taking a breather from a sell-off that took it to its lowest level in more than 2-1/2 years last week, while sterling slipped as investors awaited the outcome of Brexit trade-deal talks.

An index tracking the dollar’s value rose 0.1% to 90.95. So far this year, the dollar was down nearly 6%, on pace for its weakest yearly performance since 2017.

“The monetary and fiscal stimuli we’re seeing is going to reflate the world and that leads to a weaker dollar and should be good for risk and emerging market currencies,” said Axel Merk, president and chief investment officer at Merk Investments, which oversees $1 billion in assets.

Positive vaccine news from Johnson and Johnson and Pfizer Inc on Tuesday supported equities and lifted risk appetite, but the dollar held its own.

Upbeat economic sentiment data from Germany lifted the euro earlier in the session, but it was last flat to slightly lower at $1.2104.

German investor sentiment soared more than expected in December on expectations that vaccines against the coronavirus would boost the outlook for Europe’s largest economy.

The ZEW economic research institute said its survey of investors’ economic sentiment moved up to 55.0 from 39.0 in the previous month. A Reuters poll had forecast a reading of 45.5.

So far this year, the euro has gained roughly 8% versus the greenback.

Dominic Bunning, head of European FX Research, at HSBC wrote in his latest research note, that the euro’s strength, which has been more aggressive than in the summer, could be problematic for the European Central Bank.

“A stronger currency tightens financial conditions, which is incredibly unhelpful for an economy facing persistent disinflationary pressures,” Bunning said.

The ECB holds its monetary policy meeting on Thursday.

Investors, meanwhile, continued to focus on Brexit trade deal talks.

With only three weeks to go for Britain to fully complete its exit from the European Union, leaders have failed to narrow differences on a post-Brexit trade deal.

The pound though trimmed earlier losses and briefly popped into positive territory after Britain said it had clinched a deal with the European Union over how to manage the Ireland-Northern Ireland border.

Against the dollar, the pound was last down 0.2% at $1.3354. It was also 0.1% lower against the euro, which rose to 90.63 pence . Implied volatility on the pound – a measure of expected future swings in the currency – hit eight-month highs, a sign that traders were preparing for gyrations.

The dollar was up 0.1% against the yen at 104.16 yen, but fell 0.2% versus the Swiss franc to 0.8893 franc.

Dollar slides as market looks ahead to U.S. stimulus; sterling drops

The dollar fell against most currencies on Monday in choppy trading, as investors looked past the surge in coronavirus cases and ahead to a possible new COVID-19 U.S. stimulus deal and vaccines to fight the virus.

The U.S. Centers for Disease Control and Prevention (CDC) on Monday reported more than 280,000 deaths.
Sterling, meanwhile, slumped after Britain and the European Union said on Monday conditions for a Brexit trade deal were “not there.”

White House economic adviser Larry Kudlow on Monday said talks on another round of stimulus funding to deal with the deadly coronavirus pandemic are moving in the right direction, and President Donald Trump’s administration and Congress are getting closer to agreement.

Negotiations on a relief deal gathered momentum in the U.S. Congress on Friday, as a bipartisan group of lawmakers worked to put the finishing touches on a $908 billion stimulus plan.

“The market expects a stimulus deal to eventually arrive along with the vaccine and those are seen as putting the U.S. recovery at a faster and more sustainable path,” said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington. “That’s negative for the dollar.”

In addition, the Federal Reserve is expected to make more adjustments to its quantitative easing later this month.

“The question for most is whether this is just the beginning of the U.S. dollar slide and whether the theme has more juice,” said Mark McCormick, global head of FX strategy at TD Securities in Toronto. “As we noted in our 2021 global outlook, the U.S. dollar is likely to slide through the course of 2021. Yet, it’s unlikely to be a straight line. U.S. dollar cycles tend to last six years on average, and this one is just getting started,” he added.

The dollar fell 0.2% against the Japanese currency to 104 yen, sliding as well versus the Swiss franc to 0.89 franc, also down 0.2%.

The greenback also fell against commodity currencies such as the Australian and New Zealand dollars as well as the Norwegian crown.

An index that tracks the dollar against a basket of currencies was little changed at 90.795, not far from 90.471, its weakest since April 2018. The British pound came off steep lows and was down 0.7% at $1.3349, falling 0.7% as well versus the euro, which last traded up at 90.66 pence.

EU chief Ursula von der Leyen and British Prime Minister Boris Johnson said in a joint statement on Monday that sealing a new trade deal was impossible now “due to remaining differences on critical issues”.

But Johnson will go to Brussels in coming days in an attempt to bridge significant differences in Brexit talks over level playing field, governance and fisheries.

Euro bursts through resistance, dollar holds near 2-1/2 year low

The euro was headed for its best week in a month on Friday and has blown past major resistance levels as investors piled into bets the U.S. dollar has further to fall while the world begins to emerge from the Covid-19 pandemic.

The common currency is up 1.5% for the week so far and last sat comfortably at $1.2145.

Having finally breached $1.2000 after multiple attempts, momentum funds have surged in to long positions. The next serious chart resistance level is not until $1.2555.

“The euro is holding above the $1.21 level for the first time since spring 2018, despite the fact that there is only a week to go before the European Central Bank is expected to add more policy stimulus,” said Rabobank strategist Jane Foley.

“There is no doubt that the actions of the Federal Reserve have been hugely successful at weakening the value of the dollar since the spring this year.”

The euro is also set for its best week against the Japanese yen in six months, even though the yen rose a little against a broadly weaker dollar on Thursday.

The yen was steady against the dollar on Friday, sterling held near a one-year peak and other majors eased a fraction, while Asian currencies advanced.

Investors have turned heavily short dollars in recent months, figuring rates will stay low for a long time in the United States forcing yield-seekers to head elsewhere for better returns.

Even worries about a painful winter of deaths and lockdowns in the United States has failed to drive too much safe-haven demand for dollars, as investors reckon on more government support – either in the form monetary easing or fiscal spending.

Against a basket of currencies the dollar has shed about 12% from a three-year high of 102.990 in March, to hit a two-and-a-half year low of 90.504 on Thursday and held near that level on Friday.

“No point standing in the way of dollar weakness for now, especially while risk-on sentiment is still extending,” said OCBC Bank strategist Terence Wu.
Flow riders

Besides the euro, trade-exposed currencies in Asia have also surged over recent weeks as optimism about the region’s recovery gathering pace – especially with vaccines on the horizon drives flows in to assets from Seoul to Sydney and Singapore.

The Chinese yuan, an increasingly popular vehicle for investors to bet against the dollar, made a 29-month high of 6.5358 per dollar.

The South Korean won rose 0.7% to its strongest since mid 2018 as foreign inflows sent the Kospi equities index to a record high some 90% above its March lows.

The Australian and New Zealand dollars backed away slightly after hitting more than two-year highs on Thursday. The Aussie was last down 0.2% at $0.7427 and the kiwi softer by the same margin at $0.7061.

They are both on track for a fifth consecutive week of gains, a streak that has lifted the kiwi most of all and raised it some 8.6% above late-September lows.

Later on Friday, investors are looking to U.S. jobs figures due for the latest signs of the recovery losing momentum, while the fate of the pound is largely in the lap of Brexit trade deal negotiators who remain locked in talks.

“Traders need to assess their sterling exposures into the weekend,” said Chris Weston, head of research at Melbourne brokerage Pepperstone.

“If I were running long exposures, I wouldn’t be adding … but questioning, if we see a deal, how punchy the gapping risk will be,” he said. “If we don’t get a deal and the rhetoric from (EU negotiator Michel) Barnier or the British camp shows limited progress then we could see GBP/USD gap lower on Monday.”

Dollar slides to 2 1/2-year low on vaccine, stimulus optimism

The dollar slid to a 2-1/2-year low against a basket of major currencies on Thursday as investors wagered that more economic stimulus from Washington and the expected start of Covid-19 vaccinations would support riskier assets.

While U.S. legislators have failed to reach agreement on fresh relief for a pandemic-hit U.S. economy, there were early signs that a $908 billion bipartisan proposal could be gaining traction.

Investors expect lawmakers to reach a deal eventually with the two parties also facing a Dec. 11 deadline to pass a $1.4 trillion budget or risk a shutdown of the government.

Britain on Wednesday approved a Covid-19 vaccine developed by Pfizer and BioNTech and said it would start vaccinating those most at risk early next week.

“Britain is starting vaccination and the U.S. is also expected to do so in coming weeks while coronavirus infections appeared to have peaked in Europe and the same could be said for the U.S. as well,” said Yujiro Goto, chief strategist at Nomura Securities.

“All of these are easing worries about the economic recovery losing steam.”

That optimism more than offset disappointing U.S. jobs numbers for November and helped boost the euro despite widespread expectations the European Central Bank will enhance its quantitative easing next week.

The common currency ticked up slightly to $1.2119, touching its loftiest level since late April 2018.

The dollar index slipped to 2 1/2-year low of 90.948 and last stood at 90.992.

“On the whole, the new U.S. economic team under President Biden will be dovish, if not directly pursing a weaker dollar per se,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

“The next target for the euro should be its February 2018 peak of $1.2555.

When the ECB eases its policy next week as expected, I bet the euro will gain rather than fall,” he added.

The U.S. currency was on the back foot against most other currencies, apart from the safe-haven yen, against which the dollar held firmer at 104.47 yen.

The Australian dollar traded at $0.7409, having hit a 26-month high in the previous session after data showed Australia’s economy rebounded more than expected in the third quarter.

The offshore Chinese yuan changed hands at 6.5478 per dollar, near its 2-1/2-year high touched last month, maintaining strength on expectations a Biden White House would be more conducive for China’s economic growth.

The British pound held near a three-month high, last traded flat at $1.3387 after a choppy Wednesday trade as markets looked to whether Britain and the European Union can clinch a trade deal.

The negotiators may have enough progress to agree on a deal in the next few days, the BBC’s political editor said, giving the pound a slight lift.

The EU’s chief Brexit negotiator told member states’ envoys on Wednesday negotiations were reaching “a make-or-break moment”, and they urged him not to be rushed into an unsatisfactory agreement.

Four diplomats told Reuters after a briefing by Michel Barnier the talks remained snagged on fishing rights in British waters, ensuring fair competition guarantees and ways to solve future disputes.

As traders also brace for a make-or-break moment, the pound’s implied volatilities have risen. Both the overnight and one-month volatilities have hit one-month highs, an indication investors expect choppy trade.

Bitcoin dipped 1.0% to $19,043, but stayed near its record high of $19,918 hit earlier this week.

Dollar hovers near 2-1/2 low as traders eye U.S. stimulus talks

The dollar stayed near a 2 1/2-year low on Wednesday as investors cautiously eyed developments in talks about further fiscal stimulus from the United States, while risk currencies held onto gains on improving risk appetite.

Against major currencies, the dollar index fell 0.7% to 91.318, having hit its lowest level since late April 2018 of 91.263 overnight.

The Euro and the Kiwi steadied after an overnight jump to their 2 1/2-year highs as the dollar broadly weakened.

U.S. Treasury Secretary Steve Mnuchin and House of Representatives Speaker Nancy Pelosi held stimulus talks for the first time since the election, while a bipartisan group of senators and House members proposed $908 billion worth of coronavirus relief measures.

Pelosi said in a statement after the talks that Mnuchin would review coronavirus relief proposals.

U.S. Senate leader Mitch McConnell said on Tuesday that Congress should include a fresh wave of coronavirus stimulus in a must-pass $1.4 trillion spending bill aimed at heading off a government shutdown in the midst of a pandemic.

“The currency market is skeptical whether these proposals could be agreed in a swift manner, since hopes were shattered once already when a stimulus package didn’t come into fruition before the presidential election,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“Traders are closely eyeing for convincing clues that the agreement is actually reached,” he said.

Also weighing the safe-haven dollar was weaker-than-expected U.S. manufacturing activity data and speculation that the Federal Reserve will act to support the economy before vaccinations become available.

Fed Chair Jerome Powell and Mnuchin urged Congress to provide more help for small businesses amid a surging coronavirus pandemic and concern that relief from a vaccine may not arrive in time to keep them from failing.

The Fed meets to set policy on Dec. 15-16.

The euro held ground against the dollar after its strong performance overnight as it hit the highest level since May 2018. It last fetched $1.2067.

Analysts said the European Central Bank could act against a rapid rise of the currency.

Sterling also remained near a three-month peak against the greenback after Times Radio said Brexit trade deal talks have entered the “tunnel” stage of negotiations.

Separately, a senior British minister said on Tuesday there was still a chance of a no-trade deal Brexit as talks with the European Union had snagged on fishing, governance rules and dispute resolution.

The pound was little changed at $1.3421.

The risk-sensitive Aussie firmed to 0.7389 per dollar after the Australian GDP data was released, while the New Zealand dollar changed hands at $0.7071, holding steady near the highest level since April 2018 hit overnight.

Bitcoin rose to 0.3% at $18,833.63 after hitting a record high just under $20,000 on Tuesday.

Dollar loses some bounce as focus shifts to Fed

An under pressure U.S. dollar handed back part of its month-end bounce on Tuesday, as investors reckoned on more monetary easing by the Federal Reserve and a gathering recovery elsewhere.

The risk-sensitive Australian and New Zealand dollars edged higher, with the Aussie up 0.3% and the kiwi up 0.5%. The euro rose 0.3%, though all three currencies remained below where they sat before Monday’s dollar bounce.

Sterling crept higher as traders clung to hopes for a Brexit trade deal before the year’s end and the yen edged down to a week low as equities rose with the broadly upbeat mood.

Investors are heavily short dollars as optimism about promising vaccine trials drives buying of riskier currencies and higher yielding assets outside the United States.

Even worries about rising coronavirus cases have not offered too much support to the greenback, as speculation grows that the Federal Reserve might act to support the economy through a tough winter before vaccinations can turn the tide on the pandemic.

“There’s a general view that there’ll be something in the December meeting … given there’s no real fiscal development in the last few months,” said BNZ senior markets strategist Jason Wong.

The Fed meets to set policy on Dec. 15 and 16, though before then – on Tuesday and Wednesday – Fed Chair Jerome Powell will appear before Congress and his remarks will be closely watched for any clues as to the next moves.

The policymakers gather as authorities mull approving two effective vaccines, developed by Pfizer and Moderna for distribution, while at the same time surging virus cases have put the brakes on the U.S. economic recovery.

Powell, in prepared remarks released on Monday, said a “challenging” few months lie ahead and that it is difficult to assess the economic implications of vaccine developments yet.

“A full economic recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities,” he said.

Against a basket of currencies the dollar was a fraction softer at 91.825, after struggling to find traction above 92.000 on Monday.

Elsewhere in Asia, the Chinese yuan was back on the front foot – holding firm onshore and snapping three sessions of losses in offshore trade after decade-high factory activity growth figures underscored China’s remarkable recovery.

It last traded at 6.5751 per dollar onshore.

The Reserve Bank of Australia, meanwhile, left policy settings unchanged on Tuesday, as expected.

Governor Philip Lowe’s statement was cautiously optimistic but said it would take until the end of next year for gross domestic product to recover 2019 levels and emphasized that the rebound’s momentum depended on policy support.

European inflation figures and U.S. manufacturing data is due later on Tuesday.

Britain and the European Union also warned each other on Monday that time was running out to reach a Brexit trade deal, though investors remain hopeful and have kept the pound at $1.3361 and 89.46 pence per euro.

Talks between EU chief negotiator Michel Barnier and British chief negotiator David Frost are ongoing and the EU team are expected to stay in London for two or three more days.

“Further talk that we could see a deal in the next few days makes shorting the pound tough,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne.

“Although once we get a deal, and assuming it does play out, then sterling may offer some good shorting opportunities as it turns less political and stands out as a funding currency – the fiscal situation makes for some incredibly sobering reading.”

Bitcoin was down about 2% and, at $19,354, just below a record high of $19,864 hit on Monday.