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FX drivers on Friday: UK threatens 'Australia Style' deal and ECB ready to respond to the new Covid spike

-->FX drivers on Friday: UK threatens 'Australia Style' deal and ECB ready to respond to the new Covid spike                
  • GBP: PM Johnson concludes UK may need to get ready for an “Australian” style deal (sources) - An Australian style deal is essentially “No Deal” given the bulk of EU-Australia trade is currently conducted under WTO rules. The UK stance since February has been that it was ready for this eventuality, so there is not much new here. More meaningful would be if the UK actually threatens to walk away from the table, which is not the case as of yet. If the worst that comes of negotiations is that the UK threatens No Deal but stays at the negotiating table, this looks a relatively sanguine outcome (and can be judged from the lack of sterling’s response to Johnson’s comments on Friday).  

  • GBP: EU also hardens its position but still looks for a deal – prior to PM Johnson’s comments is a communique from the European Council (EC) noting ‘concern’ on lack of progress and calling for ‘all stakeholders to step up their work on… readiness… for all outcomes…,’ highlighting that discussions should continue over the coming weeks in an attempt to secure a deal. But the EC also calls on the UK ‘to make the necessary moves to make an agreement possible’. EU negotiator Barnier comments ‘we (the EU) remain determined to reach a fair deal’ while reports suggest UK negotiator Frost has advised the UK PM to continue with talks over the coming weeks.

  • EUR: ECB ready to respond to the Covid spike - ECB President’s Lagarde in comments Friday acknowledges the new Covid-19 spike in Europe. Speech references –(1) Uncertainty about path the pandemic takes is likely to dampen strength of the recovery and affect resilience of the labor market; (2) Governing Council will carefully assess all incoming information, including developments in the exchange rate on implications for the medium-term inflation outlook; (3) Stands ready to adjust all instruments to ensure that inflation in a sustained manner, in line with ECB’s commitment to symmetry.

  • EUR: The comments come as the new Covds-19 spike becomes more serious in EU than US with the latest data reported by the EU ECDC suggesting Europe is about to surpass US in hospitalizations adjusted for population. EU reports a 35% increase in Covid-19 hospitalizations in the week October 5-12 while US hospitalizations rise 11% in the same period. At the same time though, the situation is vastly different to March/April with significantly greater awareness, testing capacity and treatment. Therefore, the EU has alternatives to full lockdowns. Note though that Citi analysts downgrade their 2020 euro zone GDP forecast by 0.5pp to -7.2% and also lower their 2021 GDP forecast by 1.0pp to +4.6% in light of the Covid-19 situation.               

 

Data releases Friday: US retail sales show spending while unexpected decline in industrial production highlights risks but likely temporary 

  • USD: US retail sales advance more strongly than expected in September, with total sales up 1.9%MoM (Citi 1.2%, consensus 0.8%) and the control group up 1.2%MoM (Citi 0.2%, consensus 0.3%). Continued strength in retail spending supports Citi analysts above-consensus call on the speed with which US economic activity will likely return to pre-pandemic levels.  
  • USD: Industrial production unexpectedly declines 0.6%MoM in September and manufacturing production also declines 0.3% but is revised higher in August, from 1.0% to 1.2%. Citi analysts are surprised to see a pullback in manufacturing production, but would not yet read too much into a modest one month decline, given stronger hours worked and revisions higher to August production.  

 

Week Ahead

  • USD:  Fiscal negotiations to continue, final Trump – Biden debate and Fed speak - Senate Republicans plan to bring up an ~$500bln targeted fiscal package which is unlikely to find bipartisan support and Citi analysts think a pre-election deal is unlikely. Substantial Fed speak is also likely to garner attention with Vice-Chair Clarida speaking on Monday but the marque event in the US this week will be the 3rd and final debate between President Trump and former Vice President Biden.   
  • EUR: Euro area Manufacturing PMI, Oct Flash: Forecast: 54.7, Prior: 53.7; Services PMI, Oct Flash: Forecast: 49.2, Prior: 47.6; Composite PMI, Oct Flash: Forecast: 51.6, Prior: 50.1 – Citi analysts estimate that the euro area flash composite PMI will rebound in October, breaking the negative trend of the past couple of months and look for a 1.5-point increase to a two-month high of 51.6, below its 52.5 historical average. Despite a sharp increase in the number of new Covid-19 cases in Europe during October, private sector activity will likely expand faster in October, but Citi analysts acknowledge that the risk to their forecast is probably to the downside  
  • GBP: Manufacturing PMI, Oct Flash: Forecast: 53.8, Prior (Final): 54.1; Services PMI, Oct Flash Forecast: 52.1, Prior (Final): 56.1 - Citi analysts expect manufacturing PMI to remain well in expansionary territory as new orders continue to pick up and also expect the rate of employment reductions to fall somewhat. Both trends should offset a moderation in the actual output index. Citi analysts expect these data to remain relatively robust over the coming months. But amid a renewed increase in Covid cases in the UK, Citi analysts expect the UK services PMI to fall back sharply though support among business services should mean this remains in expansionary territory overall.
  • AUD: Australia September (prelim) retail sales: Citi forecast: -0.1%, Previous: -4.0% - Retail sales in September are expected to decline slightly following the sharper stepdown in August. That said, retail sales are still strong and Citi analysts’ forecast implies real retail trade will likely rise 5.7% in Q3.
  • CNY: China  GDP (%YoY) 3Q 5.5 5.5 3.2 – Citi analysts maintain their GDP forecast at 5.5%YoY for Q3. Domestic activity recovery has been on track over the past three months if still uneven while the PMI index of new export orders has returned to expansion for the first time this year in September  

 

This is is an extract from the Daily Currency Update, dated October 19, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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