Brexit: 3rd Meaningful Vote likely as well as more EU discussions

-->Brexit: 3rd Meaningful Vote likely as well as more EU discussions; Weaker US data sees a lower USD;  BoJ downgrades Japan outlook  

• PM May team’s remains in talks with Northern Irish (DUP) lawmakers whose support she needs to get her deal over the line (twice rejected) in a 3rd Meaningful vote likely this week (March 20). Nigel Dodds, a leading member of the DUP says the talks are “constructive” and will continue. PM May’s Brexit deal may still pass the third time around if the DUP, the ERG (hard Brexiteers within the Conservative Party) and enough Labor rebels support it, for example in return for financial support to Northern Ireland or Theresa May’s commitment to resign. 

• US industrial and manufacturing production both miss expectations with the former rising just 0.1%MoM in February versus 0.4% expected and manufacturing production falling -0.4% versus 0.1% expected. Citi analysts expect a dip in overall real US GDP growth in Q1 to 1.7%, followed by a reacceleration in Q2, pointing to a rebound in durables orders in January and some upside for manufacturing. Meanwhile, the March University of Michigan sentiment index beats expectations, bouncing to 97.8 vs 95.6 consensus forecasts, a decent recovery from February’s 93.8 and coming with a gain in income expectations. However, rising income expectations are accompanied by lower expected year-ahead inflation rates - expectations for 1Yr inflation fall to 2.4% vs 2.6% prior, but 5-10y inflation expectations rise to 2.5% vs 2.3% prior.           

• The BoJ meeting comes in largely in line with expectations, with rates unchanged but downgrades its economic assessment for exports, factory output and overseas outlook. Governor Kuroda also comes out in support of the 2% target, perhaps needed as support elsewhere within the Japanese government wanes for such an ambitious target.                            

USD better supported overnight due to short term CNY weakness   

• CNH weakness is the main driver of USD support overnight following weaker Chinese data (refer Asia EM strategy) and US – China headlines of a likely further delay in the Trump – Xi meeting. Data out overnight shows US new home sales in January (release delayed by the government shutdown) unexpectedly declining -6.9%Mom vs +0.2% consensus forecasts. The data reflects the weakness in housing into the end of 2018 but the more forward looking indicators are already starting to show a recovery in line with Citi analyst expectations.     

• The BoJ board meeting concludes today. Citi analysts expect BoJ to remain reluctant to announce any additional stimulus. Nevertheless, BOJ officials expect both Japan exports and production to remain weak in Q1, with the focus firmly on how weak global demand weighs on capital investment.  

The Week Ahead – Fed FOMC may change “dot” and economic outlook for the US             

• This coming week sees the March FOMC meeting. Citi analysts expect the Fed to change the median “dot” to indicate one hike only in 2019 but with hawkish risks that it keeps them unchanged at two. End of balance sheet reduction may also be announced and the meeting is also likely to see changes to the Fed’s assessment of the US economy.

Brexit - Choice now is between short versus long extension         

• Should Theresa May’s Brexit deal be passed by the UK parliament in this week’s possible 3rd Meaningful vote, then the UK would exit the EU into a transition phase after a short extension (probably by 22 May) and start trade talks. Alternatively, if the deal fails, then the government would likely reach out to the opposition and the EU for soft Brexit and seek a longer extension. BOTTOM LINE - While an extension (whether short or longer term) still requires EU agreement (and indications from the EU are that they will likely accede to UK’s request), overall, Friday’s developments should offer reassurance to GBP investors.    

• This week in Europe, EU leaders will discuss China, Europe's industrial policy, and US-EU relations (Wednesday and Thursday) while in the UK, all eyes will be on the 3rd Meaningful vote in the UK parliament on Theresa May’s Brexit deal, if one is called. On the data front, Citi analysts expect German ZEW Expectations to come in at -10 (Tuesday), German manufacturing PMI at 48.0 (Friday), UK core inflation at 1.9%YY (Wednesday) and Eurozone PMI at 50.0 (Friday). On Thursday, the BoE meets and is expected to keep rates unchanged. 

Mixed Canadian data; Softer Australian and NZ data unlikely to change RBA’s and RBNZ’s neutral stance  

• Canada - CAD is heavy on Friday as Canadian existing home sales fall -9.1%MoM in February versus -4.0% prior. This follows the decline in the new housing price index data last Thursday by -0.6%, the first decrease going back to 1990. However, Canada’s manufacturing sales jump in January, ending a string of bad prints, rising 1% vs 0.4% consensus forecast and versus the -1.3% decline seen in December. This week’s focus will be on the 2019 Canadian Budget and January retail sales and February CPI. Retail sales excluding autos could rise for the first time in five months, while CPI YoY should remain below 2%.

• Australia - Citi analysts see the current weaker sentiment indicators as unlikely to translate into further slowing in hard activity data, nor leading to reactive monetary policy changes as the data is still consistent with economic activity that can produce meaningful consumption and employment growth. Furthermore, this outlook is consistent with the RBA’s near and medium term outlook. Markets await this week’s Australian employment data on Wednesday.

• New Zealand – Citi analysts forecast Thursday’s NZ GDP to show economic activity expanded by 0.6% in Q4. This would represent a solid acceleration from the 0.3% pace recorded in Q3 and would produce a year-ended growth rate of 2.5%. At 0.6% however, GDP growth would be 0.2pp below the RBNZ’s forecast of 0.8% but Citi analysts expect quality of growth to be solid, from labor intensive private sectors, allowing RBNZ to retain its neutral policy stance.

China provides further stimulus boost via VAT cuts  

• China announces a host of stimulus measures on Friday that include VAT from April 1 for various sectors, including manufacturing to 13% from 16%, transportation and construction to 9% from 10% and cuts to social insurance contributions and social security fee from May 1.           

• This is an extract from the Daily Currency Update, dated March 18, 2019. Please approach a Citigold Relationship Manager if you would like more information.