Brexit progress, US – China trade deal continue to support risk sentiment; USD weakness likely to extend but beneficiaries to vary

Brexit progress, US – China trade deal continue to support risk sentiment; USD weakness likely to extend but beneficiaries to vary     

• USD & Safe Havens: Some initial dialing back of optimism relating to the US – China trade deal are reversed following comments from US Treasury Secretary Mnuchin and China’s Global Times chief, indicating – (1) there will be a principal level call the week of October 21 and deputies will meet ahead of the APEC meeting on  November 16-17; (2) US officials Mnuchin, Lighthizer and Chinese Vice Premier Liu will meet at that forum and once formalized, Presidents Trump and Xi will finalize a deal; (3) Comments from Treasury Secretary Mnuchin - “I expect there will be a deal before December 15,”….recent talks saw “substantial progress.”. December 15 tariffs will only go into effect if there is no China deal; (4) Comments from Global Times’ chief editor backing Mnuchin’s comments - “….the two sides have the strong will to reach a final deal. Initial statement of the Chinese side is moderate. This is China's habit. It doesn't mean China's real attitude is not positive.”         

• GBP: Positive Brexit momentum despite some dialing back of expectations overnight; Key highlights – (1) Queen’s speech passes while PM Johnson continues to campaign for backing of his vision; (2) Opposition parties to wait to see if Boris Johnson will strike a deal with the EU in the next 48 hours before making their next move; (3) Finland’s PM Rinne does not think there is enough time for a deal to be ready before the EU Summit this week, saying, “I think there is no time in a practical way and in a legal base to reach an agreement before the Council meeting, I think we need to have more time. If there is a possibility to negotiate after the Council meeting, it would be so.”           

• USD weakness likely to extend but beneficiaries to vary – (1) Fed rate cut coupled with US political tensions (Trump impeachment proceedings) - Tactical weakness in USD likely with JPY and Gold expected to be the key beneficiaries. (2) Positive US – China trade developments - USD weakness likely against Commodity currencies (AUD, NZD & CAD) as well as Asia EM; Safe havens (JPY & Gold) to also likely weaken across the board (ex USD). (3) Progress on Brexit - USD likely to weaken against EUR and GBP; safe haven CHF likely to decline against both EUR and GBP.   

• USD: The week ahead in the US, trade policy will remain 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: Brexit - Not a “done deal” but getting closer          

• GBP: Despite some negative headlines overnight, sterling remains elevated, following a UK Daily Telegraph report that a Brexit deal appears to be taking shape thanks to "last-minute compromises." Under PM Johnson’s proposal, a pared-down version of Theresa May’s customs partnership would see Northern Ireland 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 system to compensate affected businesses.  But still a difficult path to meet the October 31 deadline – (1) The proposal would likely involve an untried system of tracking goods with “lots of ifs and maybes”. (2) Attitude of the DUP and subsequently hard Brexiteers needs to be watched though the DUP has already shown some flexibility. (3) Getting all 27 members of the EU to ratify a deal by the end of the week at the EU summit – a tall order but not impossible. (4) Getting UK parliament to pass the deal on Oct 19 and subsequently write the necessary legislation to pass into law before the Oct 31 deadline – difficult and a technical extension may still be required.     

• GBP: The week ahead sees the EU Summit as the focus for any new Brexit settlement and also features 2 speeches relevant for BoE policy (Cunliffe and Vlieghe) as well as UK jobs, CPI and retail sales. In the euro zone is German ZEW survey and ECB speak ahead of the October meeting. Speakers include chief economist Lane and Dutch central banker Knot.   

Commodity bloc: Week Ahead     

• CAD, AUD & NZD: Canadian headline CPI this week should rise slightly to 2%YoY though core measures are more important for BoC policy.  Australian jobs data this week will be watched as the unemployment rate has started to move higher and 11bp of cuts are priced into the next RBA meeting (consensus +15k, 5.3% UR). This week’s Q3 NZ CPI release (consensus 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 15, 2019. Please approach a Citigold Relationship Manager if you would like more information.