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Yen Lower on Return of Risk Appetite, Sterling Support by Hope of No No-Deal Brexit

Yen drops broadly today, as stock markets rally on supposed easing tension in Hong Kong. After more than two months of continuing protests, Hong Kong leader Carrie Lam finally announced withdrawal of the controversial extradition bill today. HSI closed up 3.9% on rumors leading to the announcement while HK and China related stocks in Europe also lead others higher.

However, it should be noted that only one of the five demands of the protesters is met. It’s seen generally as being “too little, too late”. Most importantly, the widely supported demand of an independent judiciary on police brutality was rejected. Threat of being a police state remains. Protests in Hong Kong would not stop at this stage, in particular with the debate of HK human right and democracy act in US Congress scheduled for next week.

Staying in the currency markets, Dollar is currently the second weakest, followed by Canadian Dollar. The Loonie is cautious ahead of BoC rate decision. While BoC is widely expected to stand pat, there could be a dovish turn in the accompanying statement. On the other hand, Sterling is the strongest one, riding on hope of averting no-deal Brexit. Australian Dollar is the second strongest, followed by Euro.

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In Europe, currently, FTSE is up 0.54%. DAX is up 1.11%. CAC is up 1.24%. German 10-year yield is up 0.052 at -0.652. Earlier in Asia, Nikkei rose 0.12%. Hong Kong HSI rose 3.90%. China Shanghai SSE rose 0.93%. Singapore Strait Times rose 1.29%. Japan 10-year JGB yield dropped -0.0086 to -0.284.

US trade deficit narrowed to $54.0B, deficit with China also dropped

US goods and services trade deficit dropped -2.7% to USD -54.0B in July, slightly smaller than expectation of USD -54.2B. Exports rose 0.6% to USD 207.4B while imports dropped -0.1% to USD 261.4B. Trade deficit with China dropped USD -0.5B to USD 29.6B in July. Exports dropped USD -0.3B to USD 9.3B while imports dropped USD -0.8B to USD 39.0B.

Also released, Canada trade deficit widened to CAD -1.1B in July, versus expectation of CAD 0.2B. Labor productivity rose 0.2% qoq in Q2, above expectation of 0.1% qoq.

UK PMI services dropped to 50.6, PMIs suggests -0.1% GDP contraction in Q3

UK PMI Services dropped to 50.6 in August, down from 51.4 and missed expectation of 52.0. Markit noted weaker rises in business activity and new work. Margins were squeezed by sharpest cost inflation since January. Growth projections also dropped to lowest since July 2016. All Sector Output Index dropped from 50.3 to 49.7, second sub-50 reading in three months.

Chris Williamson, Chief Business Economist at IHS Markit, said: “Business activity in the service sector almost stalled in August as Brexit-related worries escalated, curbing spending by both businesses and consumers. So far this year the services economy has reported its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants, and business-to-business services.

“After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.”

UK Johnson to seek general election but Corbyn refuses to fall for his trick

In UK, lawmakers will start debate of Labour lawmaker Hillary Benn’s bill to block a no-deal Brexit at 1500GMT. Votes on the bill should be held before 1900GMT. It’s highly likely for the bill to be supported. Then Prime Minister Boris Johnson will seek a general election, possibly with a vote at 2030GMT.

Ahead of today’s schedule, Labour Leader Jeremy Corbyn said the party would not fall for “Boris Johnson’s tricks”. And they would not support a new election until the threat of no-deal Brexit is removed.