Fed Still Sees Policy Accommodative

Fed Still Sees Policy Accommodative       

• Overnight sees comments from Fed Governor Powell at the Sintra conference in which he sees the Fed is still accommodative, maybe 100bp below neutral (versus the current cash rate of 1.75 – 2.00%) which reinforces the Fed’s stance that calls for gradual rate hikes. Powell also warns however that hitting zero rates in future may be quite possible and on trade, there are rising concerns among Fed’s business contacts that could lead to change in outlook if tensions worsen significantly.

• Trade Tensions: The next 1-2 months will likely indicate whether these tensions escalate into full-blown trade wars but uncertainty to remain high in the interim. The direct impact of the (so far) announced tariffs is modest but a full-blown trade war could have much larger effects and does not appear to be sufficiently discounted in market pricing. That said, the base case is for negotiations to continue and a full blown trade war (such as the additional $200bn extension) remains unlikely.

EUR: ECB’s Nowotny highlights reasons behing EUR’s current weakness                   

• ECB’s Nowotny highlights the weakening euro as a function of Fed-ECB policy differences. As he says, “what we also see, is that we have a development of the exchange rate that’s leading to a significant weakening of the exchange rate against the dollar”. “That’s surely primarily a development of the interest-rate policy, where the ECB wants to keep its rates on hold at least until summer of next year, while the US has announced rate hikes, so that the difference between European and US rates becomes stronger”.

Commodity Bloc: RBA governor more confident on meeting inflation goal

• Comments from RBA Governor Lowe at the Sintra meeting overnight see him confident that Australia will get back to the RBA’s 2.5% inflation mid point target and while he sees the shift in trade policies as worrying, he thinks tariffs themselves won’t probably derail global expansion. At the same time, the domestic outlook in Australia is also changing for the better as highlighted by recent comments from Governor Lowe and RBA minutes.

Asia EM: Counter-cyclical-factor may returns to dampen CNY moves

• USDCNY fixings continue to rise and increases the risk the PBoC may deploy ‘counter-cyclical-factors’ to contain large intraday movements and help restrain fears of RMB debasement in reaction to trade tensions. However, Citi analysts believe the PBoC is likely more concerned about the pace of depreciation than outright USDCNY level and the path of least resistance for now likely lies for USDCNY to move higher. Expectations for a further easing in monetary policy by the PBoC and less supportive corporate FX conversion and stock market flows also add to the risk of further (but contained) CNY declines.

This is an extract from the Daily Currency Update, dated 21st June 2018. Please approach a Citigold Relationship Manager if you would like more information