Brexit Fears Weigh On Sterling

Overview: The odds of a UK-EU agreement and new stimulus before year-end in the US have faded and are sapping risk appetites ahead of the weekend. Although most Asia Pacific equity markets gained, China and Australia were notable exceptions, European shares are heavy, and the Dow Jones Stoxx 600 is near three-week lows. It is set to end a five-week rally.US shares are also trading heavily. Bond markets are bid. In fact, yields in several countries, core as well as periphery, are at new record lows. The US benchmark is at a nearly two-week lows below 0.90%. The dollar is mostly higher. Among the majors, sterling is bearing the brunt and is trading below $1.3200.The yen is proving more resilient. With US and EU sanctions coming, the Turkish lira is leading the emerging markets currency complex lower. The dollar traded above TRY8.0 for the first time in a few weeks. The JP Morgan Emerging Market Currency Index is paring this week's gains, which are the sixth in a row. Gold is pinned near the mid-week trough and is trading inside yesterday's range. A close above $1840 would lift the technical tone. Oil prices are consolidating lower after yesterday's surge that lifted Brent to $50 and January WTI to almost $48.  

Asia Pacific

South Korean exports surged in the first ten days of December.  The 26.9% year-over-year jump follows a 4% gain in November. The fewer working days skew the report, but South Korean exports still rose a strong 11.9% when adjusted. Semiconductor exports surged at 53%, and exports of cell phones and autos also recovered. Exports to China, the EU, and the US rose. This captures two important investment themes. The first is the recovery in East Asia, which seemed to be leading the world. The second that trade flows appear to be recovering faster than many expected.  

New Zealand house sales surged by 30% in November, and prices rose by about 15%. The central bank pushed back against proposals for parliament to include house prices in its formal mandate. The RBNZ argued that it would lead to below target levels of employment. Separately, it proposed that it be allowed to take debt/income ratios into account in setting macro-prudential policies. Low-interest rates fuel higher house prices in many countries, and the housing market is one of the leading sectors in many recoveries. As the pandemic eases, the elevated prices may begin impacting policy outlooks.

One of the reasons Asia exports its surplus savings is that many countries have under-developed their own capital markets. This is gradually changing as the local corporate bond market broadens and deepens. Yesterday, Japan's NTT sold JPY1 trillion of bonds (~$9.6 bln), which is the largest offering in the local market. Four tranches were offered, and demand was strong.  

The dollar had held above JPY104 for the past two sessions, but yesterday recorded a bearish shooting star candlestick, and the greenback is set to snap a three-day, albeit small advance. Follow-through selling saw it dip below JPY103.95 to test the week's lows. Resistance is now seen near JPY104.20.Note that the dollar has settled between JPY104.05 and JPY104.25 for the past five sessions. The Australian dollar's gains were extended to a little more than $0.7570 today. Recall it closed at $0.7425 last week. It is the strongest of the majors, with a nearly 1.5% gain this week. It is the sixth consecutive weekly gain. Support was found in early European activity near $0.7520.Additional support is seen near $0.7480. The PBOC's reference rate for the dollar was set at CNY6.5405, a little stronger than expected.  The yuan has softened by about 0.2% this week as it consolidates its recent gains. It is only the fourth weekly decline here in Q4. It slipped in two weeks in Q3. Note that money-market rates (e.g., overnight repo and seven-day repo rates) jumped higher today, and the PBOC will likely address the funding squeeze next week. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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