-->Dollar negatives rise as Trump’s recovery puts a contested election back in play while fiscal stimulus talks remain in limbo
USD: President Trump’s recovery a short term risk positive but further raises US election uncertainty - risk sentiment stages a moderate recovery overnight as President Trump announces via Twitter of his exit from Walter Reed Medical Center even as doctors remain wary following 2 doses of supplemental oxygen during his stay. The extent of COVID cases amongst Trump’s team also continues to unravel that could complicate coordination heading into the election. But for now, the announcement suggests President Trump could return to his election campaigning sooner (barring any further health complications) though which raises 3 questions – (1) Impact on Trump’s campaign – does his inability to campaign in person (especially in swing states) as he goes into quarantine represent a setback to his election chances?; (2) Covid-19 back in focus - Covid-19 risks have been off the radar in recent weeks, but will that now shift? Should coronavirus become a bigger campaign issue, this is likely to be negative for Trump’s election chances; and (3) A Biden/ contested election – does Trump’s return to “normal” elevate the chance of a Biden win (his lead over Trump has been fairly stable in polling) at best or a contested election at worst? – “yes” to all 3 is potentially negative for risk sentiment and USD.
- USD: Phase 4 stimulus talks still in limbo - Bloomberg sources overnight report that Treasury Secretary Steven Mnuchin has spoken with President Trump but the administration still sees the best pitch for more coronavirus relief at USD1.5tn. Logistical hurdles may also delay any deal with Senate Leader McConnell stating that Senate would convene later on October 19 after three Senators test positive for Covid-19. House speaker Pelosi and Mnuchin have also spoke with no significant developments and negotiations between the pair are set to continue tonight.
A Brexit Deal: All a matter of time(ing)
- GBP: Brexit - Intensified negotiations now planned for the coming weeks following a bilateral discussions between PM Boris Johnson and European Commission President Von der Leyen over the weekend. Reports suggest that both sides agree to intensify talks and re-affirm their commitment to finding a deal, striking a more positive tone than reflected at the European Council summit on Friday. EU Chief Negotiator Michel Barnier is reportedly set to discuss potential compromises on fisheries with key member states early this week, before UK-EU discussions resume on Wednesday. Aside from fisheries, the two other outstanding issues remain the level playing field – and particularly state aid – as well as the dispute resolution mechanism.
Data releases overnight – US services ISM, UK inflation expectations
- USD: US ISM Services stays strong with employment rising – the ISM Services index rises again in September following a modest pullback in August, increasing to 57.8. The three major activity subcomponents all increase, with business activity rising to 63.0, new orders up to 61.5, and employment gaining to 51.8. With the renewed climb higher in the employment subcomponent, Citi analysts expect overall continued job gains in the US through the rest of this year and into 2021, although at a slower monthly pace and potentially with greater monthly volatility due to disruptions to normal seasonal hiring patterns.
- GBP: Sharp rise in longer term inflation expectations yet to be priced into sterling - UK households’ long-term expectations jump significantly in September to 3.6% from 3.2% in August (well above the 2.9-3.1% corridor they had oscillated within since August 2019 and the 2.4% to 3.4% range since 2016 and to their the highest level since November 2013) - according to the Citigroup/YouGov Inflation Tracker and short-run inflation expectations tick up to 3.2% from 3.0% in August (0.9pp above levels from February 2020 and also above the 2005-2019 average). Citi analysts are now concerned about the possibility of further increases that could suggest challenges to the current outlook for anchored inflation expectations in UK.
Key data/ events in the week ahead
- USD: Phase 4 fiscal developments and election polls - Even if a phase 4 fiscal deal is reached in US this week, there will likely be uncertainty about whether there are enough votes to pass in Congress. Election polls will also be watched to ascertain whether there is any shift based on Trump’s positive COVID-19 test or the first Presidential debate.
- USD: FOMC Minutes and Fed speak- Forward guidance in the post-meeting statement at the September FOMC was changed to reflect the new long-run goal of achieving 2% inflation on average. The debate around the exact wording may be helpful about eventual plans for liftoff (which, for most officials, likely occurs around 2023 end). Markets will also watch for guidance on potential changes to asset purchases. Fed speak includes Chair Powell, Williams to discuss Flexible Average Inflation Targeting and Evans to discuss US economy and monetary policy.
- AUD: Federal Government Budget preview - JobKeeper and JobSeeker are unlikely to see a broad-based extension of the JobKeeper wage subsidy past its Q1 expiry date in 2021; Personal income tax cuts - stage 2 and 3 of the previously promised personal income tax cuts from the start of FY23 and FY25 respectively could be brought forward; Infrastructure spending – Citi analysts think around AU$37bn could be flagged as high priority projects that are fast-tracked, increasing infrastructure work done by 8% p.a. over the next 5 years.
- AUD: October RBA Monetary Policy Board Meeting: Citi cash rate target forecast; 0.25%, Previous; 0.25%, Citi 3-yr target forecast; 0.25%, Previous; 0.25% - Calls have increased for the Bank to cut the policy rates in October. However, for Citi analysts to switch to the rate cutting camp, it would require a dovish addition that suggests further rate cuts are imminent.
This is is an extract from the Daily Currency Update, dated October 6, 2020. Please approach a Citigold Relationship Manager if you would like more information.