A correction to yesterday’s piece - PM May has not announced her resignation but could announce her departure timetable tonight

A correction to yesterday’s piece - PM May has not announced her resignation but could announce her departure timetable tonight    

• Cable’s plunge to the mid 1.2650s this week appears to in anticipation of PM May’s departure plans that could be announced as early as tonight (according to press reports). Latest headlines from FT indicate that a departure timeline will likely emerge from the PM May-Brady meeting (Brady is Chair of the Conservative Party’s 1922 Committee) tonight with a leadership contest likely launched on June 10. This comes after reports that one of her few remaining allies, Foreign Secretary Jeremy Hunt withdraws his support for her last-chance Brexit bill on which PM May’s hopes of survival rest. If she does announce her resignation tonight, she would still likely remain PM until a new leader is elected, meaning she would almost certainly leave before the end of July.                

A toxic mix of geopolitical risks starting to extend the risk aversion theme potentially into Q3’2019     

• Global equities and yields once again head lower overnight in tandem, exiting to a safe haven flight for FX (JPY,  CHF and Gold) as US – China trade tensions deepen, euro zone risks (weak PMI data, Italian politics and EU parliamentary elections) prevent EUR from being able to post sustainable gains (with the exception of last night) and Brexit turmoil resurfaces.

• The war of words (and actions) between the US  and China continues to escalate and while Citi’s base case is that a successful XI – Trump meeting in late June may see trade talks re-start, markets on the other hand now appear to be gradually leaning towards a more protracted trade dispute with possibly more US tariffs to come, therefore setting the stage for a more protracted risk aversion theme for Q3’2019 that would likely favor safe haven currencies such as JPY, CHF and Gold as investors bail out of risk currencies such as AUD and NZD.     

• USD on the other hand appears to be showing mixed results and the Citi analyst view is that it will likely eventually structurally weaken as (1) US fiscal stimulus fades and the US growth outlook slows markedly in 2020 that could also compel the Fed to cut rates, and (2) the longer term historical pattern typically suggests that USD depreciation (vs. G10) tends to be the longer term norm, occurring in bursts of around ten years, interrupted by bouts of USD strength for five or six years at a time. Historically, USD now seems to be in that period where longer term deprecation is likely.  

Brexit turmoil raises chance of “No Deal”; No turnaround in EZ surveys while German IFO slides towards recession quadrant     

• With PM May potentially set to announce her departure timetable, this also means that her Withdrawal Bill is now effectively dead and attention will shift on who ultimately succeeds her as PM (hard Brexitter Boris Johnson is favorite though there are other more moderate contenders such as Anna Leadsom who also resigned from PM May’s cabinet). The Citi analyst base case is that PM May’s successor will be probably be unable to deliver Brexit with or without a deal either – leaving a general election later this year or in early 2020 as the most likely outcome. Bottom Line – renewed Brexit turmoil with the now real possibility of a “No Deal” Brexit emerging leaves sterling vulnerable across the board but particularly against safe havens (JPY, CHF and Gold).

• In the euro zone. weak data continues to hamper the EUR’s bid to make sustainable gains (with the exception of last night) even as USD sentiment remains mixed. Key data highlights –

• Euro zone May composite PMI is roughly stable at 51.7 vs. 51.5 in April (consensus and Citi 51.7) but divergence between the export-oriented manufacturing and domestic-oriented services remains as large as ever and consistent with euro area GDP growth of 0.2% QQ, leaving little room for growth to accelerate in 2Q. Markit also notes “New export orders fell markedly again, down for an eighth successive month, though the decline was less steep than in the prior two months” and “optimism about the future meanwhile slumped to a four-and-a-half year low”. The euro zone data is largely influenced by Germany where manufacturing PMI is roughly unchanged at 44.3, vs. 44.4 in April and well into recessionary territory though the composite German output PMI is up slightly for the second consecutive month (to 52.4).     

• Germany’s IFO also shows weak but stable business expectations amid a sharp decline in the current assessment component, which moves it from a slowdown towards the recession quadrant. The Ifo’s expectations component, which tracks business investment is nearly unchanged at 95.2 in May (consensus 95.0, Citi 94.0) but below the long-run average of 98 while the current assessment component plunges from 103.3 in April to 100.6 in May, lowest since August 2016, but still a bit above average.

• Markets now await the outcome of the EU Parliament elections on Sunday.  The results are likely to show a more fractured European landscape with all eyes on the two most divided countries - the UK and Italy (the latter has particular relevance for euro as Italy deputy PM Salvini has repeatedly said he is prepared to see Italy break EU borrowing limits – his party is expected to perform well in the EU elections).             

Singapore – MAS likely to stand pat at October meeting  

• Policy data dependent with Citi’s base case for MAS to stand pat in October - with MAS’s core forecasts close to Citi’s (1.4%) and within comfort thresholds, Citi analysts’ base case is for the MAS to stand pat in October. As for whether the MAS could ease in October, the hurdle is high, and would require a stronger conviction for core inflation to average below 1% through 2020.      

• This is an extract from the Daily Currency Update, dated May 24, 2019. Please approach a Citigold Relationship Manager if you would like more information.