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FX

Growth risks and renewed focus on the Federal Reserve

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  • Key highlights overnight: Market remains focused on growth risks before shifting attention to potential action by the US Federal Reserve. 1) US ISM non-manufacturing print for September was weaker-than-expected, following weak ISM manufacturing data earlier this week. Market pricing on a potential rate cut by the Federal Reserve in October has increased. 2) UK services PMI also missed expectations, meaning all three of the UK Markit PMIs are in contraction territory.

 

USD: USD traded down following the weaker-than-expected ISM non-manufacturing data before rebounding as markets focus on the likelihood of potential Fed action.

  • The 52.6 ISM non-manufacturing index reading in September was much weaker than Citi (55.4) or consensus (55.0) had expected. The index level and the 3.8 point monthly decline are the lowest and largest since August 2016. Unexpectedly weak ISM non-manufacturing following ISM manufacturing data earlier this week (in contraction at 47.8) increases the risk of a more substantial slowing in the US economy. However, despite increased downside risk, Citi’s base case remains for economic growth to continue around 2% for the remainder of 2019 and into 2020.
  • Citi analysts think a further 25bp rate cut in 2019 is now the likely case and could come as early as October, depending in part on strength or weakness in the upcoming non-farm payrolls data. October FOMC pricing moved -4.8bp overnight, with the market now pricing -22bps of cuts. Fedspeak did not receive a lot of attention but did include a notable mention. Dallas Fed President Robert Kaplan stated that the Fed would be exceedingly cautious in deciding how much stimulus to unleash – some took this as quite hawkish given the recent data.  

 

GBP: Brexit damage

  • UK’s services industry unexpected contracted in September, marking the first contraction since 2016. IHS Markit’s Purchasing Managers Index for services slid to 49.5 in September (from 50.6 in the prior month), below the 50 mark that indicates expansion. The Composite Index fell to 49.3 in September (from 50.2 in the prior month).
  • Remains sensitive to Brexit headlines. UK PM Boris Johnson gave a statement at the House of Commons on his Brexit proposalAs things stand, Citi analysts think that PM Johnson’s deal could get through the line in the House of Commons. But first, the EU needs to accept it, which is what matters for GBP. The latest headlines suggest the EU is on the fence.

 

EUR: Possibilities after WTO decision

  • Yesterday, the WTO confirmed that the US could impose tariffs on USD7.5bn of European goods after the Airbus ruling. The tariff announcement includes a 10% tariff on commercial aircraft and 25% on agricultural and industrial goods and could take effect on October 18. As these countermeasures would have been authorized by the WTO, if implemented (which Citi expects), then the EU is not allowed to retaliate. However, a similar WTO ruling on Boeing subsidies can authorize the EU to impose tariffs, but such a decision is not expected before mid-2020.

 

JPY: BoJ expectations

  • JPY: advanced to a seven-day high against the dollar after the US ISM data, with USDJPY slipping 60pips towards 106.50, before losing some steam. The BoJ continues to build expectations for the meeting later this month. BoJ member Funo said the October meeting will be “very important,” Funo. In prepared remarks, he said “If we expect momentum toward our price target is going to be lost, we need to prevent that from happening in advance.” 

 

AUD: Trade balance still high

  • AUD: Australia’s trade balance for August was not quite a market-mover, but came in at AUD5.9bn, lower than expected but still quite high. The last print was a record at just above AUD7bn. Australia’s Services and Composite PMI numbers for September were healthy at 52.4 and 52 respectively.

 

This is an extract from the Daily Currency Update, dated October 4, 2019. Please approach a Citigold Relationship Manager if you would like more information.

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