Safe haven FX still in demand ahead of the G20 meeting next week

Safe haven FX still in demand ahead of the G20 meeting next week    

• With the BoJ leaving policy unchanged yesterday (relative to rising expectations that the BoJ may cut interest rates by a further 10bp to -0.20%) and with only a marginal downshift in the statement,  pointing to China risk and subsequent influence on the consumer and business mind, this takes USDJPY to the low on the day at 107.21. On Gold, Citi analysts see the current bullish gold fever as justified post the June Fed meeting and a $1,500/oz price target seems reasonable on “real” FOMC follow through over the 12 months should Fed policy rate expectations approach zero, markets price-in Fed QE and real US rates plunge into negative territory.  Even if this scenario does not materialize in full, continuing market volatility and global growth concerns coupled with weakening US and global high frequency economic data is likely to act as a bullish tailwind for Gold via both the rates and USD channel.   The   

More signs of a US manufacturing pullback but Citi base case is for no Fed cuts (for now)       

• As the weak Empire survey earlier this week suggests, the June Philly Fed business activity index released overnight also falls short of expectations at 0.3 versus consensus for 10.4 and 16.6 prior. Details underscore the disappointment with prices paid falling from 23.1 to 12.9 and new orders from 11.0 to 8.3. Shipments also see a dip from 27.6 to 16.6, while employment softens in both the number of employees (down from 18.2 to 15.4) and average workweek (down 10.9 to 7.3). The results leave investors debating whether the US June ISM report on July 1 is likely to be weak.      

• Citi analysts base case on the Fed: cuts on the table but not a done deal - While the Fed statement and dots keeps rate cuts as early as July on the table, the outcome does not change Citi’s base case for no cuts in 2019 – which also remains the base case for a slim majority of Fed officials. The statement is revised as expected with “patient” removed and in its place sees the committee “closely monitoring” conditions and will “act as appropriate.” This signals the committee will cut rates should downside risks to the outlook materialize and if the Fed does decide to cut, the most likely scenario will be a 50bp cut in July and an early end to balance sheet reduction. Implications for USD - With the greenback tending to weaken in the 1-2 months prior to the first cut of the cycle, there remains room for further tactical USD weakness should the Fed gear up for action.        

BoE unanimously in wait and see mode; Brexit – down to Boris Johnson (“No Deal” advocate) vs Jeremy Hunt (more market friendly)      

• The BoE MPC leaves rates and the size of the balance sheet unchanged at 0.5% and GBP 435bn respectively with a 9-nil unanimous vote (Citi analysts had expected 2 dissents in favor of a rate hike). The BoE though lowers its UK 2Q GDP estimate to 0.0% QQ from 0.2% QQ, noting that downside risks to growth have increased since May on account of global trade tensions and an increasingly perceived likelihood of a “No-Deal” Brexit. But the MPC reiterates that ongoing tightening of monetary policy at “gradual and limited” pace is still needed, assuming a smooth Brexit. Note that Citi analysts have removed an August rate hike from their baseline and now believe that the window for a tightening of monetary policy has probably closed for 2019.          

• Brexit developments overnight see UK Tories holding their fifth and final elimination round of the Leadership contest, leaving hard Brexiteer and former foreign secretary Boris Johnson to face off against the more market friendly Jeremy Hunt (current foreign secretary).  An interview with the likely future PM Boris Johnson overnight gives some insights into his thinking – (1) On Brexit - will seek to re-negotiate May’s deal (though does not spell out how), but seemingly won’t shy away from a ‘No Deal’ Brexit; (2) Policies - seeks to be a socially-liberal, pro-business PM, potentially with fiscal stimulus coming quickly; (3) General election - clearly setting his party on an election footing – goal is to defeat opposition Labor leader Corbyn fairly swiftly but maintains this will be after Brexit is concluded.          

NZ - Solid Q1 GDP growth should help ensure OCR stability; RBA Governor signals further rate cuts to come      

• NZ economy expands by 0.6% in Q1, matching consensus while the yearly result is better than the expected 2.3% at 2.5% and with good compositional support. Implications for monetary policy - the result is  stronger than the RBNZ’s forecast of 2.2% and shows the economy eroding the small negative output gap slightly faster than expected and argues for an unchanged RBNZ cash rate next week.  Most importantly for NZD, Citi analysts do not expect next week’s RBNZ statement to re-insert the rider comment from the March 27 policy statement of “placing upward pressure on NZD” as NZD remains at an 8 month low on a USD and TWI basis and well below the average of the past 5 years.

• RBA Governor Lowe uses his speech yesterday to describe how the RBA assesses the degree of spare capacity in the Australian labor market. Says monetary policy can and should seek to reduce this spare capacity and that it is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.” There is no mention of QE and Citi analysts continue to ascribe a very low probability of QE being deployed in the current policy cycle.   

CNY/ CNH gain on rising “optimism” about the G20 next week 

• CNH rallies the most yesterday since December 4, also helped by rising hopes for G20 next week. After closing at 6.9036, USDCNY drops to 6.8505 currently with USDCNH painting a similarly impressive picture, trading at 6.8541 with selling seen by leveraged names with interbank trading volumes rising to roughly 600% above the 30d average. 

• This is an extract from the Daily Currency Update, dated June 21, 2019. Please approach a Citigold Relationship Manager if you would like more information.