Another mixed session for risk overnight with new vaccine and fiscal stimulus hopes offset by US coronavirus, US – China concerns

Another mixed session for risk overnight with new vaccine and fiscal stimulus hopes offset by US coronavirus, US – China concerns                                  

• G10FX: In what is now becoming an all too familiar pattern, risk assets and USD once again see-saw intraday during the US session overnight with the S&P500 turning positive for the year to reach a high of 3235 (accompanied by a weaker USD) only to end down nearly 1% (and USD up) by session end. The price action is likely proof of continuing headline risk surrounding - COVID-19, US-China tensions, emerging US election risks (late last week) and now more evenly balanced risks to the global recovery as opposed to an upside bias over the past 2 months OFFSETTING new vaccine hopes, China’s relatively sustained economic recovery and potential for more color on US Phase 4 fiscal stimulus and the European Recovery Fund.           

• USD & CNY: The negatives – (1) US Covid – 19 second wave - In the US, Florida adds a record 15,300 virus cases Sunday, the biggest one-day rise since the coronavirus outbreak began in the U.S while New York, California and Texas all reach almost 12,000 in a single day, a 6% daily rise compared to an average increase of 4.8% over the last week. Meanwhile, COVID-19 hospitalizations in the biggest states continue to grow exponentially accompanied by emerging capacity concerns. (2) US – China tensions extend beyond HK - US-China headline risk remain skewed to the downside but this time it is about the South China sea with US Secretary of State Pompeo adding overnight - “We are making clear Beijing’s claims to offshore resources across most of South China Sea are completely unlawful as is its campaign of bullying to control them.” More action is expected from the Trump administration in coming days.             

• USD & EUR: The offsets – (1) New vaccine hopes – 2 major drug makers receive fast track designations while one is in talks to start a phase III trial - which is critical for determining the efficacy of the vaccine. The news notwithstanding, markets may be underestimating vaccine development timeline and the difficulty of making an effective and widely available vaccine.  (2) Fiscal stimulus hopes - Meanwhile, attention is shifting to US Phase 4 fiscal stimulus discussions ahead of end-July deadline while Friday’s EU President compromise sees Council President Charles Michel presenting a long-term EU budget of EUR1.074trn (2.4% smaller than the EUR1.1tn initial proposal) plus the Recovery Fund of EUR750bn with original parameters unchanged. Citi analysts expect Friday’s EU Council Summit to arrive at broad agreement on the EU Recovery Fund and even though  full negotiations may not be concluded, this is likely to be a short term effect only as eventual agreement remains very likely.     

The Week Ahead: US retail sales, ECB & BoC board meetings, Australian jobs but China data is the one to watch                                        

• USD: June Retail Sales – Citi: 4.4%, median: 4.6%, prior: 17.7%; Retail Sales ex Auto – Citi: 4.9%, median: 4.5%, prior: 12.4%; Retail Sales ex Auto, Gas – Citi: 3.7%, median: 5.8%, prior: 12.7%; Retail Sales Control Group – Citi: 2.5%, median: 4.5%, prior: 11.0% - Following a very-strong initial rebound in retail sales in May, Citi analysts expect a more moderate but still-solid 4.4% increase in total retail sales in June while sales in the retail control group should rise 2.5%.        

• EUR: ECB meeting on 16 July may turn out to be the least eventful of the year. The foreseeable bounce in activity as European economies re-open is likely to see ECB adopt a wait-and-see attitude for now. However, Citi analysts still expect the ECB will need to dynamically adjust its asset purchases more or less in line with the increase in public deficits later in 2020.  

• CAD: BoC meeting – Citi: 0.25%, median: 0.25%, prior: 0.25% - BoC is expected to keep rates unchanged and retain its weekly bond purchases of CAD5bn. The July meeting will also feature an updated Monetary Policy Report to serve as BoC’s base case for activity this year. Inflation estimates will likely show inflation below the 2% target in 2020 and into next year.

• AUD: Australian June Labor Force Survey: Citi employment forecast; -60k, Previous; -227k; Citi unemployment rate forecast; 7.6%, Previous; 7.1%; Citi participation rate forecast; 62.9%, Previous; 62.9% - There’s a high degree of uncertainty around the data but overall, it will likely show additional job losses in June, though Citi analysts expect this to be the final month of a decline in employment. Citi analysts also expect 7.6% to be the peak in unemployment rate.

• CNY: China Exports (%YoY) June: Citi -4.6, Consensus -2.0, prior -3.3; Imports (%YoY): Citi -9.0, Consensus -8.8, Prior -16.7; Trade Balance (US$bn): Citi 54.5, Consensus 57.1, Prior 62.9 – Citi analysts expect negative trade growth to continue as deteriorating external demand weighs on exports. Meanwhile, the negative growth of Chinese imports may narrow from -16.7%YoY in May to -9%YoY. This leaves the trade balance a still large US$54.5bn versus US$62.9bn in May.

• CNY: China GDP (%YoY) 2Q: Citi 2.5, Consensus 2.5, Prior -6.8 – Citi analysts maintain their GDP forecast at 2.5%YoY for Q2. Meanwhile, China industrial production may have further improved to 4.8%YoY in June given the rise in Manufacturing PMI. Together, industrial production should maintain its 4~5%YoY growth in June, though the curve may not be as steep as it has been for April and May. Chinese retail sales may decline though the drop is likely to be less, to -1%YoY in June. Overall however, consumer spending is still likely to remain sluggish.

• CNY: China Fixed Assets Ex Rural (%YoY YTD): Citi -3.0, Consensus -3.4, Prior -6.3 - FAI growth may have advanced further to around -3%YoY Ytd in June as policy efforts deployed earlier to boost investment should be at work and particularly support traditional and new infrastructure development. Property investment’s relative resilience will likely continue, while manufacturing investment may remain a drag given the cloudy business outlook.                

This is is an extract from the Daily Currency Update, dated July 14, 2020. Please approach a Citigold Relationship Manager if you would like more information.