Pound and Rand rise; Indices slide in quiet trade

Summary:

• Pound jumps on Brexit breakthrough

• Rand surges on unexpected rate rise

• Stock indices decline with more losses for Deutsche Bank

• EURUSD hovers around 1.14 as the ECB stay the course

• USDJPY: Key year for monetary policy ahead

There was a strong move higher in the pound this morning following positive Brexit-related reports. EU and UK negotiators are said to have agreed upon a draft text of future ties post-Brexit and it appears that the relationship may more closely resemble the existing one than previously thought. Overall these comments appear to be a case of the EU supporting Theresa May’s deal and throwing their weight behind it. Sterling has rallied over 100 pips or close to 1% on this to trade back above the $1.29 level before paring the gains a little as the day wore on and given the recent negativity around Brexit there’s plenty of scope for a relief rally should this move gain traction. Having said that, While the initial reaction is no doubt positive there is still scope for negative developments and the market will likely continue to be highly sensitive to Brexit related headlines going forward.         

The best performing currency today is the South African Rand, which has enjoyed a strong move higher after an unexpected hike from the central bank. The South African Reserve Bank delivered a 25 basis point increase to its benchmark repo rate which now stands at 6.75%. This has come as something of a surprise to the market with a poll of Reuters economists expecting this tool to be kept steady at 6.5%. The move higher in the Rand has seen the currency appreciate to its strongest level in several months with the USDZAR falling to its lowest level since August. Taking fibs from the lows around 11.49 seen back in February you can see that the market is looking to make a clean break below the 38.2-41.4% region from 14.08-13.95 and if the move gains traction then there is scope for sizable declines.

It’s been a fairly steady day for indices, but overall it’s been a negative one with the strong gains seen yesterday being handed back. US market have actually dropped below the weekly lows in the case of the US500 and US30, although these moves come on low volumes due to the Stock exchanges being close for Thanksgiving.  Looking at some particular stocks it’s worth keeping a closer eye on Deutsche Bank as it reported losses on risk-management trades. These losses ($60 million) came as the troubled German lender had sought to minimize risk at its US equity business. As a result, the bank was forced to cut the book’s size. However, it’s not clear if the loss is reflected in the bank’s accounts this year. Looking at the chart below one may notice that Deutsche Bank has been reporting falling revenue from equities for 13 consecutive quarters. Do note that cutbacks in the stocks division were a priority of new CEO Christian Sewing who took the job in April.

The release of the minutes from last month’s ECB monetary policy meeting has delivered no great surprises with the central bank seemingly looking to remain on their present course without any great deviations.  In recent months the ECB have become far more efficient at broadcasting policy changes meaning that rate decisions have, the majority of the time, been pretty much duds. With the APP still expected to end next month the key area to watch going forward is how quickly the bank are willing to raise their rates, with the overnight deposit rate still at -0.4%. European shares have been suffering of late with the EU50 falling 17% from the highs seen last year and clearly trending lower throughout this time.

The yen has been the most resilient currency to the US dollar strength so far this year. It has been the sole major currency which has not lost against the greenback. While the overall performance of the Japanese currency is basically flat, it does not mean that it has been the trendless market. The JPY was clearly higher during the first three months of this year when two quite profound pullbacks in the US stock market occurred. It lost momentum during the second and third quarters as a US-China trade war burst out.