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US – China/ geopolitical tensions, slowing global growth potentially amplify risks of unbalanced policy mix and keeps safe haven FX in play

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US – China/ geopolitical tensions, slowing global growth potentially amplify risks of unbalanced policy mix and keeps safe haven FX in play     

  • Safe havens (JPY, CHF & Gold): Key developments overnight on the G20 meeting this week – (1)  Chinese official confirms Chinese and US trade negotiators have begun talks Monday. Meanwhile the China Morning Post claims Vice-Premier Liu, US Trade Representative Lighthizer and Treasury Secretary Mnuchin could meet as early tonight. Singapore’s PM Lee Hsien Loong shares his thoughts on the G20, saying he expects trade negotiations to undergo a “long process” beyond the G20 and warns that consequences of the dispute will be “even more serious than the financial crisis.” (2) US – Iran tensions - remain high as President Trump and Defense Secretary Pompeo are set to announce a new round of aggressive sanctions on Iran.  
  • Safe havens (JPY, CHF & Gold): President Trump tweets on 'stubborn' Fed - says "despite a Federal Reserve that doesn’t know what it is doing - raised rates far too fast (very low inflation, other parts of world slowing, lowering & easing) & did large scale tightening, $50 Billion/month, we are on course to have one of the best Months of June in U.S. history......now they stick, like a stubborn child, when we need rates cuts, & easing, to make up for what other countries are doing against us. Blew it!"         

 

US's FX proposal to limit USD strength may get airplay at G20; Month-end rebalancing this week to potentially add to USD weakness       

  • Following the US Commerce Department’s announcement in late May that it is exploring a new rule to impose anti-subsidy duties on countries that undervalue their currencies against USD, investors expect such measures could bring higher tariffs (or a currency clause to limit currency weakness versus USD in bilateral trade agreements). Investors expect to see some updates at the G20.
  • Citi analysts’ preliminary month-end FX hedge rebalancing model suggests selling of USD this Friday. The signal measures over 1 historical standard deviation in all crosses, driven primarily by equity investor rebalancing with the signal to sell USDCAD strongest at -1.89 standard deviations.          
  • 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.            

 

Some “good news” on Italy; downturn in German ifo shrugged off; Brexit developments take yet another turn (for the worst) 

  • The Italian bond – German Bund spread narrows overnight as Italian bond yields fall on a report (citing two EU officials) that the European Commission will not formally trigger its excessive-deficit procedure (EDP) on Italy during a meeting Tuesday/Wednesday. Weekend press also brings headlines about the Italian 2020 budget and the controversial mini-BOTs proposal with Corriere della Sera saying the League leaders cannot agree among themselves whether the plan is credible (League leader Salvini is a big fan of the mini-bots that is seen as a parallel currency to EUR).
  • German Ifo expectations, which leads business investment by one quarter, falls from 95.3 in May to 94.2 in June (consensus 94.6), the second-lowest since November 2012 and closing in on the sovereign debt crisis low of 92.9. Meanwhile, the current assessment component edges up from 100.6 to 100.8 and stabilizing at above-average levels after the May plunge though the overall business climate index drops from 97.9 to 97.4 in June (consensus 97.4), worse than in the last downturn in 2016.  
  • UK Tory leadership contest continues with favorite Boris Johnson overnight doubling down on his promise to take UK out of the EU by October 31 with or without a deal. Meanwhile, latest polls show public support for Johnson down sharply – from a 27 point lead among Conservative voters last Thursday to 11 points now following the bad press over the weekend and which potentially undermines the next leader’s legitimacy and that of his policies even further.              

 

RBNZ Preview; BoC lending survey to improve      

  • 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 could conclude by saying “we will keep OCR expansionary for a considerable period to contribute to maximizing sustainable employment and maintaining low and stable inflation”.   
  • Meanwhile, Canada sees April GDP by Industry on Friday that should show a modest increase in output from a strong March. The Q2 BoC Business Outlook Survey should signal an improving domestic picture, but with increasing risks around global trade uncertainties.     

 

Singapore – hurdle for MAS easing still too high      

  • Singapore’s May core CPI comes in line with expectations at 1.3% YoY (Consensus/Citi: 1.3%, Apr: 1.3%) whereas headline inflation rises to 0.9% (Apr: 0.8%). MAS/MTI reiterates its 2019 headline CPI forecast range of 0.5 – 1.5% and expectations for core inflation near the mid-point of the 1 – 2% range. 
  • Hurdle for MAS easing still high presently, requiring strong conviction for core to be sustained below 1% - with current SGD NEER 1% slope still deemed marginally accommodative, MAS easing would likely require a stronger conviction for core CPI to average below 1%, but this is unlikely in Citi’s view. For now, any deviation from MAS’s April baseline projections are small enough to be accommodated via a weaker SGD NEER within the band. A full blown trade war though could bring growth lower to 1.5-2%, and raise easing risks, but even so, any decision will likely be weighted more heavily on expected inflation, rather than the output gap  

 

  • This is an extract from the Daily Currency Update, dated June 25, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

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