FX - The Week Ahead: USDCNY running out of room to fall further

Weak demand, base effects and the weather take their toll on August data

• CNH: Data released over the weekend shows China's domestic consumption continuing to soften in August with retail sales rising 2.1% YoY versus consensus for 2.5%and the prior month’s 2.7%. The weaker data primarily reflects a lack of consumer confidence but is also partly a result of base effects. YTD sales however show a little more resilience, coming in at +3.4% YoY in August, in line with consensus and only slightly lower than the prior month’s 3.5% YoY. The dip though is symptomatic of the slump in domestic demand that has become a major hurdle in China’s attempts to reach its growth target of “around 5%” with the weather shocks in August not helping.
   
• CNH: Other data released shows China’s new-home prices in 70 cities, excluding state-subsidized housing, dropping -0.73% from July following a -0.65% decline a month earlier. Values of used homes decline -0.95%, compared with a -0.8% drop a month earlier. Not surprisingly, property investment YTD also drops by a larger-than-expected -10.2% YoY with the decline identical to the fall recorded in the period from January to July.
   
• CNH: Meanwhile, China's industrial output rises 4.5% YoY, also lower than consensus looking for a 4.7% rise and the prior month’s 5.1% but YTD growth in industrial output fares better, rising 5.8%, coming in line with consensus though slightly lower than the prior month’s 5.9%. China’s overall urban unemployment rate for August also rises to 5.3% in August from 5.2% in the prior month and is also higher than consensus expectations for 5.2%.
   
• CNH: Credit data for August released on Friday is also soft with growth of outstanding RMB loans and TSF inching down to 8.1%YoY and 8.5%YoY respectively in August – both marking new all-time lows. New RMB loans come in at RMB900bn, lower than consensus expectations for RMB1,050bn but well up on the prior month’s RMB260bn while new Total Social Financing (TSF) record RMB3,030bn, almost in line with consensus for RMB3,017bn but also well up from the prior month’s RMB772bn. Money growth also stays low, with M2 growth unchanged in August from the prior month at 6.3%YoY but M1 growth inching down further to -7.3%YoY versus the prior month’s -6.6%YoY,  despite the presumably fading impact from cleanup of arbitrage deposits.
   
• CNH: Meanwhile, government bond issuance records a strong reading of RMB1.6trn in August, the second highest reading for a single month of all times. Yet the funding deployment is less satisfactory with higher fiscal deposits being recorded while loans to households and corporates remain subdued (households borrowing sees new short-term loans of RMB72bn and new long-term loans of RMB120bn – both lower than last August while longer term loans to corporates rise RMB490bn, also lower than last August). But the higher bond issuance may have helped China's overall fixed-asset investment (FAI), which includes major items like infrastructure construction, manufacturing and property spending, that rises 3.4% YTD, though still lower than the seven-month rise of 3.6% in January – July.
   
• CNH: The overall data does not bode well for China’s domestic demand or reflation and perhaps recognizing this, the PBoC responds in a rare statement by saying “we will make maintaining price stability and pushing for the mild rebound in prices an important consideration for monetary policy and meet reasonable financing demand for consumption in a more targeted way… preparing to launch some additional measures, further lowering the financing costs for businesses and households, and keeping liquidity reasonably ample.” 

How long could exports help sustain China’s growth?     

• CNH: Data released earlier last week sees China’s exports accelerate in August for the fifth consecutive month and at the fastest pace in 17 months, even with less favorable base from last year while imports come in below expectations, dragged by weak domestic demand amid de-property. Export growth beats expectations, up 8.7%YoY in US$ terms, up from 7.0%YoY in July (Mkt: 6.8/6.6%YoY) while imports are up only at 0.5%YoY (Mkt: 4.0/2.5%), down from 7.2%YoY in July. As a result, the monthly trade surplus expands to US$91.0bn from the previous US$84.7bn.
   
• CNH: Exports have been the pillar holding up China’s economy while domestic demand has been dragging. But even here, there appear to be early signs of peaking export momentum from global manufacturing PMI contracting to tariff disputes set to continue into US elections. PC demand, a key driver for this year’s exports, also seem to be cooling. Trade policy is also likely to become even more uncertain with the Biden administration delaying the strategic tariffs, but with US-China tariff disputes set to continue after US elections.

Week Ahead:

US – FOMC meeting in focus this week – Fed expected to cut 25bp to a 5.00-25% Fed Funds rate

• USD: Fed FOMC meeting - Fed will likely start the cutting cycle at this week's meeting but there is still uncertainty about the size of the cut as markets price 50-50 odds of a 50bp cut. The OCIS (and Citi Research) base case is for the Fed to cut 25bp. Chair Powell is likely to sound dovish at the press conference similar to his recent appearances including at Jackson Hole emphasizing that the Fed is not looking for the labor market to loosen further.
   
• USD: US August Retail Sales Advance – Citi: -0.2%, median: -0.2%, prior: 1.0%; Retail Sales ex Auto – Citi: 0.2%, median: 0.3%, prior: 0.4%; Retail Sales ex Auto, Gas – Citi: 0.3%, median: 0.4%, prior: 0.4%; Retail Sales Control Group – Citi: 0.3%, median: 0.3%, prior: 0.3% - the August retail sales report could be an important print since it is released during the first day of the Fed meeting and could influence the decision of some Fed officials that are on the fence between lowering the policy rate by 25bp or 50bp. Citi Research expect an overall softer retail sales print in August than in July, with total retail sales falling by -0.2%MoM. But control group sales will likely increase by 0.3%MoM, similar to the gains in July.
   
• USD: US August Industrial Production – Citi: 0.2%, median: 0.1%, prior: -0.6%; Manufacturing Production – Citi: 0.2%, median: -0.1%, prior: -0.3%; Capacity Utilization – Citi: 78.0%, median: 77.9%, prior: 77.8% - Citi Research expect a 0.2%MoM rebound in both total industrial production and manufacturing in August after a larger decline in July. But manufacturing activity remains weak and as such, details of production data could be somewhat discouraging and see risks tilted to the downside.

Europe – BoE and Norges Bank meetings, UK inflation and ECB speak in focus this week

• GBP: BoE still in a cautious mood — The OCIS team and Citi Research expect the MPC to hold rates steady this week at 5.0%. Guidance is also likely to be broadly unchanged, perhaps with the exception of a reference to November as presenting a further opportunity for a re-assessment. BoE Bank Rate – Citi Forecast 5.0%, Consensus 5.0%, Prior 5.0% (2-7 vote split, nod to November).
   
• GBP: UK August inflation should see headline CPI print at 2.3% this week, in line with MPC expectations. Services inflation may rebound to 5.7% though in the months ahead, sequential services inflation is likely to normalize further. CPI Inflation, August – Citi Forecast 2.3% YY, Consensus 2.2% YY, Prior 2.2% YY (BoE: 2.3% | 2.26% unrounded); CPI Core, August – Citi Forecast 3.6% YY, Consensus 3.5% YY, Prior 3.3% YY; UK GfK Consumer Confidence, September – Citi Forecast (-13% bal), Consensus -13%, Prior -13 (confidence stalling); Retail Sales including fuel, August – Citi Forecast 0.3% MM, Consensus 0.4% MM, Prior 0.5% MM (Trend still soft); Retail Sales ex. Fuel, August – Citi Forecast 0.6% MM, Consensus 0.5% MM, Prior 0.7% MM.
   
• EUR: ECB speakers — Key Executive Board members including chief economist Philip Lane (Monday), Isabel Schnabel (Thursday) and President Christine Lagarde (Friday) are scheduled to give presentations. Is a dovish twist into the October meeting still possible? The focus will be on how worried they are about the growth outlook. Germany ZEW Expectations, September – Citi Forecast 12.0, Consensus 17.0, Prior 19.2 (Volkswagen shock); ZEW Current Assessment, September – Citi Forecast -78.0, Consensus -80.0, Prior -77.3; Euro Area: ZEW Expectations, September – Citi Forecast 16.0, Prior 17.9.
   
• NOK: Norges Bank Preview: Slowly Abandoning ‘High-for-Longer’ - as the Norges Bank meets this week, it will be confronted with major shifts in its policy rate drivers – mostly pointing to lower rates ahead. Yet, caution will likely still prevail, especially in a small open economy whose currency keeps lingering around historical lows. Citi Research expect rates on hold at a 14-year high of 4.5%, but a softer guidance on the future rate path, opening the door to a first rate cut in December.

Japan – BoJ meeting, nationwide CPI and customs – clearance trade balance in focus this week

• JPY: Bank of Japan September board meeting – Citi Forecast 0.25%, Consensus 0.25%, Prior 0.25% - last week saw BOJ board member Nakagawa commenting that higher import prices should be viewed as an upside risk factor for inflation, and repeated BOJ messaging that policy accommodation will continue to be adjusted if economic developments remain in line with projections. Four out of nine board members have now made this comment and focus will be on this week’s MPM on September 19-20 for any shift in language from the BoJ and Governor Ueda.
   
• JPY: Nationwide CPI to rise 2.8% YoY in August — Citi Research expect nationwide core CPI (excluding only fresh food) to increase 2.8% YoY in August, up from a 2.7% YoY advance in July. CPI excluding fresh food and energy also likely increased 2.0% YoY in August, up modestly from a 1.9% YoY rise in July and driven by higher inflation for food and consumer durable goods. Citi Research see not only individual factors including surging rice prices and delayed launches for new products but also potential currency effects from earlier yen depreciation.
   
• JPY: Customs-clearance trade deficit likely increased in August — the customs-clearance trade balance likely came to a ¥1.4324trn deficit before seasonal adjustment and a ¥940.3bn deficit after it in August (-¥628.7bn and -¥755.2bn, respectively in July). The deficit after seasonal adjustment likely expanded on higher imports. Import growth picked up in trade data for the first twenty days of August. While this may have partly reflected major one-off deals and the potential time lag associated with typhoons and earthquakes, a domestic demand recovery likely supported a sustained rebound.

Commodity Bloc – Australia’s August jobs, NZ’s negative Q2 GDP, Canada CPI and BoC minutes in focus this week

• AUD: Australia Labor Force data for August: Headline jobs – Consensus +25k, Prior 58.2k; Unemployment rate – Consensus 4.2%, prior 4.2%.
   
• NZD: NZ Q2 GDP (YoY) – Consensus -0.65, Prior +0.3%; Q2 GDP SA QoQ – Consensus -0.4%, Prior +0.2%
   
• CAD: Canada CPI NSA MoM (August) – Citi: 0.0%, median: 0.1%, prior: 0.4%; CPI YoY – Citi: 2.1%, median: 2.1%, prior: 2.5% - Citi Research expect the trend of subdued inflation to continue in August, with headline inflation on the month falling to 2.1%, a very favorable level for BoC officials. While there could still be some stickiness to core inflation, a continuation of recent encouraging inflation trends is likely in August. Most importantly, Boc officials have acknowledged at the September rate decision that shelter inflation, the last remaining strong element of inflation is starting to slow. Meanwhile, core inflation measures were somewhat surprisingly soft in July and with revisions, the 3-month pace of core inflation remained within the 1-3% target range. As a stronger reading from May will drop out of the 3-month period in August, it is likely that 3-month core inflation remains below 3% though leading indicators like the CFIB price plans measures suggest core inflation also remaining at or above 2.5% on an annual basis in the next few months. If August core inflation is surprisingly stronger after the softer July, this could raise the chance of another smaller 25bp cut in October (though the base case remains for a 50bp cut).
   
• CAD: BoC Summary of Deliberations - the main point of interest in the summary of deliberations of the September rate cut decision will be the perceived level of concern officials may have over downside risks to the growth outlook. At the decision itself, Governor Macklem acknowledged downside risks to the July MPR forecasts for growth to accelerate in the second half of the year and reiterated in comments last week that officials need to see activity and employment pick up from current levels. It would be a dovish indication if the summary of deliberations highlights that other officials feel similarly, and especially if downside risks to growth are a reason to accelerate the removal of policy tightening. Ultimately, Citi Research expect downward revisions to H2 growth in the October MPR, as Q3 GDP last projected at 2.8% in July is instead at best tracking closer to 1-2%. With an even wider implied output gap, Citi Research expect BoC officials to lower policy rates by 50bp in October.
   
• CAD: Canada July Retail Sales (Jul) – Citi: 0.4%, median: 0.4%, prior: -0.3%; Retail Sales ex Auto – Citi: 0.7%, median: NA, prior: 0.3% - Citi Research expect a modest 0.4%MoM rebound in total retail sales in July after a -0.3% decline in June, slightly less than Statistics Canada’s preliminary estimate for a 0.6% rebound. Sales excluding autos could be somewhat stronger, rising 0.7%MoM in nominal terms. Core retail sales (excluding autos and gas) have been particularly volatile in recent months and while inflation and employment data remain the most important indicators for the path of BoC policy, retail sales could take on increased importance in the second half of the year.

Asia EM – PBoC LPR in focus this week

• CNH: China 5-Year Loan Prime Rate (%) – Citi Forecast 3.85, Consensus 3.85, Prior 3.85; 1-Year Loan Prime Rate (%) – Citi Forecast 3.35, Consensus 3.35, Prior 3.35 – the PBoC has kept its policy rates unchanged so far this month. Recent focus could be on mortgage repricing/refinancing, which – if happens – could narrow the space for further policy rate cuts with banks’ NIM squeezed further. Nevertheless, Citi Research continue to expect small cut of 10-20bps from the PBoC within the year to signal support for the economy.