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

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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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(a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 25 million or more

(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 25 million; or

(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).

GLOBAL CONSUMER BANK (ASIA PACIFIC AND EMEA):

“Citi analysts” refer to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”), Citi Global Wealth Investments (“CGWI”) and voting members of the Citi Global Investment Committee.
Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document.

The information in this document has been obtained from reports issued by CGMI and CGWI. Such information is based on sources CGMI and CGWI believe to be reliable. CGMI and CGWI, however, do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute CGMI and CGWI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended
as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware
of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Investment products are not available to US persons. Investors should be aware
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Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For more information, please refer to https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures.

MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs,
and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong
and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

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the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom
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Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making
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themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from Its use.

CSL does not provide discretionary portfolio management services.

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