Some consolidation in USD overnight post the US – China (partial) trade deal; GBP outperformance continues

Some consolidation in USD overnight post the US – China (partial) trade deal; GBP outperformance continues     

• USD: Is marginally firmer overnight with the broad based USD Index (DXY) edging above 98.50 while EURUSD is back down closer to (but still above) the 1.10 level and USDJPY tests 108.80.  CNY also gives back some of its recent strength with USDCNH up to 7.085. The moves come as China announces that the increase in US agricultural purchases to USD40-50bn is conditional on the US rolling back tariffs. Note that there will be a principal level call the week of October 21 and deputies will meet ahead of the APEC meeting in Chile (November 16-17). Following that, US Treasury Secretary Mnuchin, US Trade Representative Lighthizer and Chinese Vice Premier Liu will meet at that forum and once formalized, Presidents Trump and Xi will likely finalize a deal.           

• USD: The week ahead in the US sees trade policy remaining center stage. Data wise, Citi analysts expect US September retail sales at 0.4%MM and retail control group to rise a solid 0.5%. US industrial production is expected at -0.1%MM and after firming last month, manufacturing production will likely decline- 0.3%MoM. Fed speak includes Vice Chair Clarida.              

• GBP: Bloomberg sources raise expectations that EU & UK negotiations are “closing in on a draft Brexit deal with optimism that there will likely be a breakthrough ahead of the EU Summit (Thursday – Friday). The sources suggest that “any draft legal text will hinge on whether PM  Johnson believes he has the support of the UK Parliament, with the backing of the Northern Irish DUP crucial.  Under PM Johnson’s proposal, Northern Ireland would officially leave the EU customs union but with UK agreeing to enforce the bloc’s customs rules and tariffs on goods moving from the rest of UK to Northern Ireland. There would be a rebate to compensate affected businesses.      

• GBP: However, Ireland's foreign minister (Simon Coveney) suggests negotiations could carry on beyond this week's EU summit amid reports an emergency EU summit could be called to  ratify an 11th-hour deal close to the Oct. 31 deadline. Simon Coveney sees goodwill and determination from both sides to get a deal, but that "it's too early to say whether it's possible to get a breakthrough this week or whether it will move into next week." Timeline – (1) EU summit (Thursday – Friday) to get all 27 members of the EU to ratify a deal by the end of the week at the EU summit. (2) UK parliament sitting on October 19 to debate and possibly approve the Brexit deal agreed upon between UK and EU. (3) Brexit deadline – October 31.         

EUR & GBP: German ZEW survey a mixed bag; Unexpected fall in UK employment but earnings resilient           

• EUR: ZEW survey expectations for Germany remains roughly unchanged in October at 22.8 (from 22.5 in Sep) though up from the recent trough of 44.1 in August and marginally better than expected (Citi: -25; Consensus -26.4). Current assessment deteriorates further to -25.3, from -19.9 in September,  lowest since 2010. and the economic clock shows all EU economies in the “recession quadrant”. However, this may not be necessarily bearish for EUR as it puts further pressure on European governments to deliver fiscal stimulus to complement ECB’s expansionary monetary policy.       

• GBP: UK employment falls 56k on a 3 month average in August (Citi 36k, Consensus 26k), the first reduction since 2017 and a marked reduction in comparison to performance over recent months. Meanwhile, unemployment increases marginally, rising to 3.9% on a 3 month average basis in August, compared to 3.8% in in July (Citi, 3.8%, Consensus 3.8%). Despite the deterioration in employment, earnings growth remains relatively robust at 3.8% %YY for total pay (Citi  3.9%, Consensus 4.0%) and regular pay (ex-bonus) at 3.8% (Citi 3.8%, Consensus 3.8%).  Citi analysts see the decoupling of weekly earnings from productivity a key concern for BoE hawks but weak employment would be a more pressing concern for the doves. The key question is whether this erodes consumer sentiment. Citi analysts think sentiment remains relatively resilient for now.     

Commodity bloc: RBA Minutes fail to mention any form of QE     

• AUD: RBA monetary policy remains mildly dovish with further cuts dependent largely on the performance of the labor market. Following the three recent rate cuts and no smoking gun for another near-term cut, Citi analysts retain their call for no further policy easing until February 2020 as the RBA appears prepared to give previous rate cuts and tax rebates more time to support activity and given previous commentary from Governor Lowe that the economy has reached a gentle turning point. No discussion of QE in the Minutes - Despite the cut to 75bps in October, the Minutes make no mention of unconventional measures. Citi analysts think markets appear to have rushed too hard into speculation about unconventional policy measures being deployed in Australia.

• CAD, AUD & NZD: The Week Ahead - Canadian headline CPI this week should rise slightly to 2%YoY though the core measures will be more important for BoC policy implications. Australian labor market data sees expectations for job growth low (consensus +15k, 5.3% UR; +34.7k, 5.3% prior). This week’s Q3 NZ CPI release (consensus 0.6%, prior 0.6%) could be significant for the RBNZ though a full RBNZ rate cut (-25bps) is already discounted for the November 12 meeting.   

Asia FX: US-China trade deal;  Singapore’s MAS eases policy               

• CNH: Can downside USDCNH momentum sustain? USDCNH reaction to the US – China trade deal suggests market may be pricing in further tariff delay in December. Citi analysts estimate an October tariff delay could push USDCNH back to 7.10 area and expectation for further December tariff truce could drag USDCNH to 7.04 area.  The team expects USDCNH to print sustainably below 7.00 only in a deal with tariff rollback. A currency pact is likely to entail commitment of no competitive devaluation and data transparency, instead of forced one-way RMB appreciation.  

• SGD: Singapore’s MAS eases monetary policy as expected - Citi analysts estimate the slope is likely reduced 50 pips to 0.5% pa given the concurrent description of a “measured adjustment”. There is no change to the width of the policy band and the level at which it is centered. MAS outlook reflects concern on growth and core inflation with Singapore’s 2019 core CPI expected to come in at “lower end” of 1-2% range”. Explicitly dovish conditional forward guidance – with MAS “prepared to recalibrate monetary policy should prospects weaken significantly” and should assumptions in the Oct 30th Macroeconomic Review prove overly optimistic, the hurdle for a shift to a zero slope in April 2020 would thus likely be lowered. Citi analysts expect the SGD NEER to grind towards +50pips from the estimated NEER over the medium term from the current >150pips.      

This is an extract from the Daily Currency Update, dated October 16, 2019. Please approach a Citigold Relationship Manager if you would like more information.