Your browser does not support JavaScript! Pls enable JavaScript and try again.

FX

China, US close to final goal on trade

Posted on

 

-->China, US close to final goal on trade 

 

  • Chinese Global Times (state-owned) editor-in-Chief Hu Xijin says on Friday that "from what I know, during the just concluded round of China-US trade talks, the two sides have discussed how to draft a document on comprehensively solving China-US trade disputes, namely a MoU. After nearly one year of tough talks, I think the finishing line is nearly in sight."            

Citi analysts revise down US GDP forecasts

  • US industrial production for January drops (down -0.6%MoM and lower than consensus for a 0.1% increase) with manufacturing production declining -0.9% as the slowdown manifests in hard data and in line with leading indicators.  Meanwhile, the February University of Michigan index rises from 91.2 to 95.5, beating 93.7 consensus though inflation expectations decline (year-ahead inflation is down from 2.7% to 2.5% and 5-10Yr expectations are down from 2.6% in January to 2.3%). Both sets of data follow the plunge in retail sales seen in December and which sees Citi analysts revising down their US Q4 GDP growth forecast from 2.9% to 2.5%. Citi analysts still hold on to their base case for 2 further Fed hikes later this year but see the Fed possibly calling an end to its balance sheet reduction as early as June.  

Dovish ECB’s Coeure weighs on euro but briefly

  • ECB Executive Board member CoeureEuro zone slowdown is stronger and broader than expected and path of inflation likely to be shallower. Says the ECB is discussing a new TLTRO. 

 

UD: Potentially ripe for underperformance against its G10 peers               

  • The weakness in US data last week (retail sales, industrial and manufacturing production and drop in inflation expectations in the Michigan consumer sentiment index) sees Citi analysts revising down their US Q4 GDP growth forecast from 2.9% to 2.5% and potentially bringing forward the timetable for an end to the Fed’s balance sheet reduction as early as June.  Citi analysts also warn that US growth differentials to the rest of the world are now in the top quartile historically. History (and Citi forecasts) suggest this may signal the start of some convergence (the implication being USD underperformance against its G10 peers).  
  • This week sees the continuation of US - China trade talks in Washington. Fed speakers include Mester (Tuesday), Bullard (Wednesday and Friday), and Bostic (Thursday).  

 

EUR: hits lows on ECB Coeure’s remarks before rebounding sharply

  • Plenty to keep euro on the defensive Friday due to (1) ECB Coeure’s dovish remarks (see page 1); (2) Spain calling snap elections after parliament rejects PM Sanchez’s  2019 budget proposal though the outcome could see a market – friendly center-right administration; (3) Autos an issue - Japan Times reports that “the US Commerce Department report has concluded that American auto imports threaten national security, setting the stage for possible tariffs by the White House. President Trump has 90 days to take action after the report publication though expectations are that Germany and Japan may be exempt. EUR’s earlier fall to the 1.1230 area on Coeure’s remarks is met by strong dip buying, taking EURUSD to a NY session close at near 1.1300.      

GBP: Sterling firms as chances of a "No Deal" fall further

  • GBP is among the best performers Friday, supported by strong UK retail sales (volumes up 1.0%MoM in January vs consensus for 0.2%), more than offsetting the 0.7%MoM decline in December. Excluding car fuels, sales rise 1.2%MoM which sees January retail sales 1.0% higher than the Q4 average. On Brexit, there also appears encouraging news with pro-Brexit members of PM May’s government now willing to keep UK tied to EU’s customs regime for as long as 5 years in an effort to break the deadlock. This accords with opposition Labor leader Corbyn’s proposal with which the EU agrees. PM May will work towards the next Meaningful Vote in the Commons due Feb. 27/28 but now has a fallback position to stay in a Customs Union with EU for 5 years if she cannot get changes to the Irish backstop. A “No Deal” Brexit now looks even less likely.   

 

  • This week there is a chance that Fitch downgrades Italy due to economic weakness though is not the Citi base case. February (prelim.) Eurozone and German manufacturing PMIs are due (Citi at 51.0 and 50.3 respectively) as well as German Ifo expectations (Citi at 95). 

 

Commodity bloc: AUD drop helpful “at the margin”; Week Ahead – BoC Governor, RBA Minutes and Australian jobs data

  • RBA’s Kent welcomes recent drop in AUD, saying “…….the recent depreciation is helpful at the margin given that there remains spare capacity in the economy and inflation remains below target.”
  • The week ahead sees BoC Governor Poloz speaking on February 21 that is likely to set the stage for the BoC’s March 6th meeting. Citi analysts do not expect the BoC to explicitly remove their hiking bias. In Australia, the RBA minutes on Tuesday will be scrutinized while employment and wage data will provide a check on the RBA’s constructive scenario for the economic outlook.  

 

Asia EM: Weaker CPI data suggests faster cooling of Chinese economy

  • China’s January CPI comes in at a lower than consensus 1.7%YoY vs 1.9% expected and PPI at 0.1%YoY vs 0.3% expected, suggesting the economy is cooling faster than expected and raising chances of further PBoC rate cuts. However, China’s money supply data shows an overall beat with M2 growth accelerating to 8.4% and new loans up a record 3.23tn Yuan vs ~3tn consensus, whilst aggregate financing is up at 4.64tn vs 3.3bn consensus. But seasonality may be at play on new loans in January while the rise in M2 is likely due to PBoC cutting RRR by 100 bps in January.

 

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

Related Articles