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Still plenty to keep safe haven FX in play ahead of the G20 meeting this week

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Still plenty to keep safe haven FX in play ahead of the G20 meeting this week    

  • Safe havens (JPY, CHF & Gold):  Mixed performances in the FX space Friday suggest risk appetite is still shaky. Key highlights -  (1) US – Iran tensions - NYT reports Friday that President Trump had approved strikes on Iranian targets but pulled back. Further US sanctions on Iran plus a US request for a special UN meeting on Iran ahead of Wednesday’s NATO meeting should keep tensions elevated. (2) US to blacklist five China entities – US. Commerce Department adds several Chinese companies involved in supercomputing to its national security "entity list". This comes ahead of the pivotal Trump – Xi meeting at the G20 this week.
  • Safe havens (JPY, CHF & Gold): (1) BoJ stands pat Friday with policy and communication with Governor Kuroda acknowledging increased downside risks but sees the global economy picking up in H2’19. Citi analysts maintain their base-case of no additional easing from Boj throughout 2019 that likely boosts the case for a stronger JPY.  (2) Citi analysts also see the bullish Gold fever as likely justified post the June Fed meeting on “real” FOMC follow through.      

 

Dovish Fed speak and bearish investor positioning point to further downside       

  • Dovish Fed speak – (1) Vice Chair Clarida does not walk back on market’s dovish interpretation of last week’s FOMC; (2) Governor Brainard sees important downside risks in “recent weeks”; (3) President Bullard explains why he voted for a rate cut; (4) President Kashkari says he sought a 50bp cut. Note Citi analyst base case is that Fed cuts are on the table but not a done deal. But if Fed does cut, it will likely be a 50bp cut in July with an early end to balance sheet reduction.
  • Citi FX positioning indicators also points to further USD downside amidst investors reviving debates regarding Trump’s USD policy last week as they highlight a sharp turn to USD shorts driven by both real money and leveraged communities (hedge funds).         
  • This week’s focus will turn to the G20 meet between Presidents Trump and Xi. Citi’s base case is for a US-China handshake but risk of tariffs remain. Data wise, Citi analysts expect US PCE inflation at 0.2%MM and 1.6%YY while personal spending should reinforce solid Q2 consumption.          

 

Euro zone manufacturing weak; Citi analysts change ECB base case      

  • EURUSD decisively breaks through 1.13 resistance on Friday despite weak June euro zone (and German) manufacturing PMIs (euro zone manufacturing PMI at 47.8 vs 48.0 and German manufacturing PMI at 45.4, a gain from May’s 44.3 but still sharply below 50 with optimism about the future dipping to its lowest since late-2014).  Citi analysts change their ECB base case – President Draghi’s Sintra speech expands the message and clarifies that the trigger for further easing is not that the situation gets worse, but rather that it does not improve. This lowers the bar for action and makes deployment of a new stimulus package in coming months a baseline scenario. A forthcoming change in forward guidance? Citi analysts see a drift towards a form of threshold-based forward guidance, not immensely different from temporary price level targeting and a possible resumption of asset purchases (rather than rate cuts) as the most likely outcome. 
  • Who will lead the EU and ECB? The challenge of picking the top leaders for the EU, including EC and ECB Presidents continues Friday with no outright winner. Another summit is scheduled for June 30 thus raising the stakes for both the EU and ECB roles – a non-German for the EU Presidency would sharply lift odds for hawkish German Bundesbank president Weidmann to take the ECB Presidency and potentially nullify the new Citi bae case on the ECB (above). In Europe this week, Citi analysts expect German Ifo Expectations at 94.0, German core CPI Inflation at 1.4%YY and euro zone core CPI Inflation at 1.0%YY.            

 

Canada - modest retail sales in line with stabilizing consumption, BoC business lending survey to improve; RBNZ preview      

  • Canada’s April headline retail sales disappoint but upward revisions for March offset April headline rises 0.1% versus 0.2% consensus, and sees the prior readings revised two tenths higher to 1.3%. Core sales however miss by three-tenths, coming in at 0.1% for April but sees a one-tenth revision higher to 1.8% for March. Underlying details are stronger than the headline suggests and Citi analysts see the BoC likely on hold in 2019.  This week sees Canadian April GDP by Industry and the Q2 BoC Business Outlook Survey that should signal an improving domestic picture, but with increases risks around global trade. 
  • RBNZ meeting - Citi analysts expect RBNZ to keep the OCR unchanged at 1.50% this week but retain the option of future cuts. Dovish concerns are driven by the global outlook but domestic activity remains solid with “employment near its maximum sustainable level”. The policy statement should conclude by saying “we will keep OCR expansionary for a considerable period to contribute to maximizing sustainable employment and maintaining low and stable inflation”.    

 

CNY gains on G20 optimism; Citi highlights 3 possible outcomes   

  • 3 potential outcomes for CNY post the G20 Xi – Trump meeting – (1) Bear scenario: Xi and Trump meet, talks do not go well, US threatens further tariffs, USDCNH breaks 7 and tests 7.15 within 3 weeks; (2) Status quo scenario: Xi And Trump meet, agree to disagree, tariffs go up as planned, USDCNH tests 7 in July; (3) Max bull scenario: Xi and Trump meet, agree to re-start negotiations in coming weeks, risk bounces, USDCNH to 6.80-85.  CNH  

 

  • This is an extract from the Daily Currency Update, dated June 24, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

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