Oil-linked currencies rise on Saudi reluctance to raise production

Crude prices rallied on Monday after key producer Saudi Arabia said supplies were “plentiful” and warned it would back sustained output reductions, lifting the currencies of oil-producing countries. Brent crude rose 1.5 percent to $73.16 following the remarks from Saudi Arabia’s energy minister, reaching its highest level since late April. “We are not fooled by current prices. We think the market is fragile”, said Khalid al-Falih.

That, in turn, prompted the currencies of oil-led economies to maintain a confident start to the week:

· The Canadian dollar rose 0.3 percent against the dollar to C$1.342.

• The Norwegian krone was up 0.2 percent to 8.77 per dollar, trading near two-month highs.

· Russia’s rouble also climbed 0.2 percent to 64.62 against the greenback.

· The Australian dollar rose as much as 1 percent, but it was further reinforced by an election result that was regarded as market-friendly.

Oil prices have rallied from under $50 a barrel in late December after Opec, Russia and other allied producers agreed to cut production by 1.2m barrels a day since January.

The Saudi comments, delivered last week, came ahead of a convention of oil officials in Jeddah to examine the efficacy of the deal. With the Saudis keen to boost the production cut deal into the second half of this year, in order to bring down inventories. Brent was trading above $73 on Monday morning, while the US benchmark West Texas was up 1.3 percent at $63.57.

UK pound tops $1.27 as Prime minister details her departure from Downing Street

Sterling languished just off four-month lows on Tuesday, with risks of a no-deal Brexit seen as growing as the wrestling to replace Prime Minister Theresa May got underway.

The prospect of a no-deal Brexit, which most economists say would adversely damage the British economy, has re-appeared as a key risk for sterling after May said last week she would step down as leader of the Conservative Party on June 7.

With the Brexit Party giving the Conservatives a wallop in last week’s European elections, many Conservative candidates contending for May’s job are under pressure to deliver a more definitive split with the EU when Britain is scheduled to leave the bloc on Oct. 31.

While foreign minister Jeremy Hunt said no-deal Brexit would amount to “political suicide”, alternative candidates including front-runner Boris Johnson have warned they are prepared for that if Brussels does not reopen negotiations over May’s thrice rejected withdrawal agreement.

Sterling slipped 0.13% to $1.2657, having traded as low as $1.2605 last week. It was down 0.2% versus the euro at 88.405 pence to stand just off four-month lows.

With no-deal Brexit probabilities remaining at around 15-20%, there is an expectation that parliament would submit a no-confidence motion against any prime minister who takes the country in that direction.

The pound has declined for three successive weeks versus the dollar and euro. It has fallen 3% in May as May failed in her battle to find a Brexit compromise with the opposition Labour Party.

Options markets are displaying increasing uneasiness about the Oct. 31 deadline, with implied volatility contracts expiring after that date trading at a considerable premium to those expiring earlier.

The premium for sterling puts — the right to sell at a certain price — has also improved compared to calls which confer the right to buy.

Renminbi volumes surge as speculators take on People’s Bank

Trading volumes for the Chinese renminbi have ballooned since the escalation in tensions between the US and China over trade, reflecting concerns among fund managers that a potential breakdown in talks could dent the Chinese economy and pile pressure on the currency.

In the week ending May 10, trading volumes in the offshore renminbi were 120 per cent higher than averages over the previous month.

The shift comes as speculative investors square off with China’s central bank over whether the renminbi will sink to Rmb7 against the dollar, a low that has not been broken since 2008.

Some speculators believe the Chinese currency is heading for a heavy fall beyond that point as the economy weakens, but many analysts believe authorities will fight to prevent an ugly decline.

Traders have reported elevated volumes and volatility for the renminbi

ever since May 5, when US President Donald Trump tweeted his intention to impose heavier tariffs on imports from the country, citing disagreements on trade talks. In the last three weeks.

China’s currency has weakened against the dollar, in both its onshore rate — which is allowed to fluctuate no more than 2 per cent beyond a midpoint set daily by the People’s Bank of China and in the more flexible offshore form.

Chinese authorities are also believed to be keen to avoid a rerun of the 2015 devaluation that triggered capital flight and led to the reintroduction of capital controls.

The reluctance of the PBoC to let the currency plummet shows in its daily fixings for the onshore exchange rate. Those fixings consistently give the renminbi a higher value than the offshore markets would imply, pushing the gap between those two rates to the widest point since February 2016.

Institutional dealers have reported that on some days, volumes in the renminbi surpass activity in the euro in early European hours. The renminbi has been the third most-traded currency on (EBS) Electronic Broking Services platform since 2015, when the PBoC’s renminbi devaluation caused a spike in volatility and activity.

Broad dollar strength and Brexit worries weigh on Britain’s currency

The UK pound dropped below the $1.27 level for the first time since January, with strength in the US dollar and unremitting apprehension over Brexit affecting sentiment. With Sterling declining by as much as 0.28 per cent to $1.269, taking its fall for May to 2.6 per cent.

Last weeks’ loss took place as the greenback similarly pushed against other leading currencies, including the euro and Japanese yen. Against the euro, the pound softened by a further 0.2 per cent, leaving May’s decline at 2 per cent.

Setting the UK currency on course for its lowest month since August 2017, with over a week yet to run, whilst investors also remain acutely anxious over the possible direction for Brexit.

The Week Ahead  – week commencing May the 27th

There are public holidays in the UK and US on Monday, so slighter shorter diaries for data, but the big item to watch this week will be the European election results and subsequent scramble to fill the top jobs. The race to succeed Theresa May as British prime minister is likely to dominate UK politics as the candidates set out their stalls, with their approaches to Brexit on display. Theresa May’s last week as Prime Minister will likely bring significant volatility for the pound despite a distinct lack of UK centric economic releases. With bank holidays in both the UK and US on Monday, we are looking at a four-day week for many.

Elsewhere, Germany flies the flag for Europe, with GfK’s consumer confidence, unemployment, and CPI releases. Elsewhere, look out for US gross domestic product (GDP), the Canadian rate decision, and a raft of Chinese data points towards the latter part of the week.

And, as in recent weeks, global markets will keep a close eye out for any developments in the US-China trade war. Extra tariffs of up to 25 per cent on $200bn of Chinese exports to the US and $60bn of US exports to China are set to come into play at the end of the week.

Economic data: China’s official manufacturing PMI data for May are released on May 31. As the impasse on trade between Washington and Beijing drags on, markets are becoming increasingly concerned about the impact that higher tariffs on Chinese imports are having on the mainland’s economy. On the flip side of that coin, the US consumer confidence survey for May is out on Tuesday. The Federal Reserve Bank of New York has calculated the latest round of tariffs will cost the average US household $831 this year, which one might reasonably expect to begin weighing on consumer sentiment, if not start to manifest in other data. Personal consumption income and expenditure, which are closely monitored by the Federal Reserve, are also slated for the Friday morning, giving another snapshot of the US consumer and inflation.

Other first-tier data releases this week include the first-quarter gross domestic product readings for India and March GDP for Canada, both out on May 31, while a day earlier there is the second reading of first-quarter GDP for the US. Turkish first-quarter GDP data on Friday will probably show the nation moving out of its first recession in about a decade, but economists are not sure the country is out of the woods yet, and point to the possibility of another contraction this year. In Brazil, data look set to head the other way, with Thursday’s GDP likely to confirm that Latin America’s largest economy contracted in the first quarter for the first time since emerging from recession in 2017.

Will the European elections boost the euro?

The intrigues of Italian politics are arrayed to be a key driver for the euro after May 26, when the results of the European Parliament elections are known. Italian bond yields ascended higher in the midst of last week, driving the gap between the yields on German Bunds and Italian debt to its broadest level this year. The uneasiness came after Italy’s deputy Prime Minister, Matteo Salvini, said that Rome should allow its fiscal deficit to rise above the EU’s upper limit.

It is a posture that suggests is liable to result in confrontations between Italy and the European Commission when the two parties initiate discussions over the country’s new budget following the elections. Economists think the European elections could determine the balance of power within Italy’s coalition government. A result that favours right-wing representatives could lead to a more confrontational approach towards the EU. A strong showing from right-wing candidates could also force a new general election.

Some analysts consider the hazard of further disruptions in Italian politics, connected with apprehension over Brexit and Chinese growth, will continue to keep the euro on the back foot. With the estimate for the single currency, expecting it to trade at $1.13 by the end of 2019. The euro is presently trading around $1.12.

Emerging market currencies suffer worst week since 2018 lira crisis

In the worst week for emerging market currencies since the Turkish lira crisis last summer. Emerging market bond and equity funds have encountered significant outflows this week, as negotiations between the US and China have halted. With Washington accusing Beijing of defaulting on trade guarantees, while China on Monday announced it would impose tariffs on $60bn of US imports starting on June 1, knocking investor sentiment further.

China’s offshore renminbi, which is commonly traded in London, stood 0.1 percent weaker at Rmb6.9400 per dollar around the outset of full European trade. It has weakened almost 3 percent over the preceding two weeks as economic hostility between the world’s two largest economies has weighed on the currency.

MSCI’s broad index of emerging market currencies has fallen 0.9 percent since Friday, its biggest drop since August last year when Turkey’s currency was in free fall and a fifth consecutive week of falls. Slipping 0.4 per cent to 1614.22 last Friday morning in London.

The anxiety is also advancing through many of Asia’s trade-sensitive economies. The Singapore dollar has suffered its worst week since October, as the island state’s economy has shown signs of weakening, while the New Taiwan dollar has rung-up its biggest one-week declines since the same time. Amid the risk-off sentiment, emerging market bond funds recorded their largest outflows since June 2018 in the week to May 15.

Sterling touches lowest since February as Brexit uncertainty drags on

The pound brushed its lowest level since mid-February as the UK currency tracked a strengthening sense among investors that Westminster’s cross-party talks seeking an accord on a Brexit agreement were floundering. A shift away from risk across global markets left sterling looking exposed and moved it towards the lower end of its trading range. Sterling fell 0.5 percent to trade at $1.2838 in midweek trading in London, close to its lowest level since February 15. February’s intra-day low was $1.2770.

As negotiations between Theresa May and the rival leader in London flag, the prime minister challenged Jeremy Corbyn to agree on whether to endorse her Brexit compromise proposal. She meanwhile planned to place her Premiership on the line in a House of Commons vote in the first week of June. Mrs May told the Labour leader the government would move forward legislation to approve a revised Brexit deal on June 4 or 5. Defeat would almost certainly mean the end of the road for the prime minister and her undertaking to take Britain out of the EU.

The opposition Labour party at the end of last week completed the cross-bench talks with the government, with leader Jeremy Corbyn saying the discourses that started in early April have “gone as far as they can”. And instead, Labour will proceed to oppose Theresa May’s Brexit deal ahead of a House of Commons vote planned in June. Sterling fell 0.3 percent on Friday to $1.2760, testing the currency’s closing lows for the year. The pound which has developed into a barometer for investors’ predictions of Britain’s exit process from the EU, has fallen 1.85 percent this week as talks drifted towards breaking up, its worst week since the one ending February 9 last year, when it dropped just over 2 percent.

Renminbi faces worst drop since summer of 2018 amid mounting concerns over trade dispute

The renminbi’s offshore exchange rate suffered its worst one-day drop since August as trade ructions between the world’s two largest economies lingered into a second week. The offshore renminbi was down as much as 0.9 percent to Rmb6.9402 per dollar as European trading got underway on Monday. The onshore renminbi, which is sanctioned to trade 2 percent either side of a daily midpoint set by China’s central bank, fell over 0.5 percent.

The onshore and offshore flavours of the Chinese currency are trading at their feeblest levels since early January and late December, correspondingly. The weakness in the renminbi develops as the United States and China have failed to achieve a breakthrough on trade tensions, which broke out up anew last week. On Monday China’s CSI 300 share benchmark closed 1.7 percent lower, continuing its decline of approximately 5 percent last week. The US is predicted to lay down a further $300bn of Chinese imports it intends to hit with 25 percent tariffs if there is no improvement in the discussions with Beijing. On Friday it raised duties on an earlier list of $200bn of Chinese goods from 10 percent to 25 percent.

Analysts estimated that vulnerability for the renminbi could again put downward pressure the currencies of other export-focused Asian countries, such as South Korea.

The Week ahead – week commencing Monday the 20h of May

The US-China trade war will continue to hang over the markets this week and is forecast to weigh on growth, along with the tech slowdown, when Japan announces its first-quarter gross domestic product figure on Monday.

Central banks The South African Reserve Bank meets on Thursday. Its policy rate was left constant at 6.75 per cent at its March meeting and no adjustment is also expected.

Investors will hope for transparency on how transient the Federal Open Market Committee believes recent weakness in economic activity and inflation to be when the central bank on Wednesday releases minutes of its May meeting.

Committee members elected to maintain rates constant, as proposed, in reply to muted inflation and economic uncertainty.

The Fed has followed a wait-and-see approach to interest rates, and some leaders have indicated they could lower rates if inflation growth does not pick up. Fed chair Jay Powell said during a news conference after the meeting he did not recognise a compelling argument to shift in either direction. The minutes of the ECB’s April meeting is also out on Wednesday.

Economic data: Analysts will on Thursday parse the further detailed issue of German GDP figures after the initial review of the world’s fourth-largest economy earlier this month showed a better than

expected rebound to 0.4 per cent. France, Germany and the wider Eurozone all have purchasing managers’ indices out this week.

In the US there will be fresh data on durable goods orders and sales of both new and existing homes.

UK inflation remained steady during March when consumer prices were 1.9 per cent higher than a year ago, the same as in February. City of London economists had predicted an increase to 2 per cent. This time the estimates are that inflation will rise above the Bank of England’s 2 per cent target.

The UK’s retail sales on Friday could once also be erratic, with the sunny Easter weekend likely to play a part. March’s year-on-year figures were more buoyant but were perceived to be flattered somewhat by fearful consumers stocking up ahead of Brexit.

Other economic reports coming up include Canadian retail sales and the OECD’s economic forecast.