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FX

Highly tactical risk environment likely to continue into July

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Highly tactical risk environment likely to continue into July                         

  • USD: Risk sentiment remains in consolidation mode through the week, returning somewhat to positive in Friday’s Asian session with S&P futures pushing 0.15% higher from Thursday’s NY close only to fall sharply by the closing of the NY session Friday. Along with the main considerations around Covid (health crisis, need for more fiscal support), Citi analysts think that July could be challenging as companies also ramp up their forward guidance.
  • USD: Coronavirus update - 14 US states see a rise in cases last week that cannot be accounted for by testing. Texas remains most concerning due to hospitalization and mobility trends though the governor has paused reopening plans (even as the state is already closer to full plans) while CEOs of the four largest hospital systems  discuss surge capacity planning post news of Houston ICU bed capacity reaching 100%. Late on Friday also comes news that Texas and Florida have decided to reverse some of their reopening measures, while San Francisco has delayed its own. Many think that the Fourth of July weekend will likely be the US’s next big test for controlling spread, though the data stemming from that would not be known for weeks.          
  • USD: US Election 2020 starting to come in play though still very early - Biden is polling higher in swing states that leads to obvious discussions regarding tax and regulation implications of a Biden presidency, as well as resumed talk over the chances for Senator Elizabeth Warren (touted to be Biden’s running mate and VP) to take helm of the Treasury. Focus on US elections is expected to only grow in the coming days and weeks given risk events on the horizon.
  • CNY; US – China tensions: China message to US “Crossing ‘Red Lines’ could put trade deal at risk’ – WSJ reports Beijing has quietly told Washington that ‘meddling’ in Hong Kong, Taiwan and other matters could jeopardize Chinese goods purchases under the Phase One trade deal.
  • EUR: Finally, note the warning from ECB President Lagarde Friday (echoing her chief economist Lane’s comments earlier last week) that the recovery from the pandemic will likely be “restrained.” While the worst of the crisis might be over, it’ll take time for the “phenomenal” jump in savings to trickle into higher investment and spending The recovery will also be “incomplete” as trade is unlikely to return to pre-crisis levels and productivity may be weaker. She also warns EU may not agree on the Recovery Fund at the July 17-18 summit        

 

Data releases – US consumer demand, French consumer confidence rebound, weak Singapore IP reaffirms possibility of MAS easing   

  • USD: US personal income falls 4.2%MoM in May, a smaller decline than consensus for -6.0% as income from wages and salaries rises 2.8%. Spending bounces-back 8.2%MoM following an upwardly-revised 12.6% decline in April - this leads to the savings rate declining to a still-elevated 23.2% from 32.2% in April. Meanwhile, core PCE inflation rises 0.10% in May and remaining at 1.0%YoY. Citi analysts expect further increases in spending to come with the elevated savings rate that points to a continued increase in consumption over coming months.
  • EUR: France – a 4-point bounce in household confidence to 3-month high, amid evidence of very high pent up demand – Citi’s composite measure of households’ personal situation rises by 9 points to 107 in June, highest since Jul-07. It probably would not take much for households to spend a lot more soon if the expected deterioration in the labor market does not materialize.   
  • SGD: May industrial production (IP) comes in below expectations at -7.4% YoY, -16.5% MoM SA (Consensus: +7.7% YoY, -5.6% MoM SA; Apr: +13.6% YoY, -0.5% MoM SA) with declines broad-based, suggesting capacity utilization remains softer than implied by regulatory constraints. Citi analysts expect Singapore’s 2Q GDP to fall by around 45% QoQ SAAR (-14.3% YoY), with a below consensus full year forecast (-8.5% YoY). Bottom Line – This leaves a 0 – 40% chance of a downward  re-centering of the NEER band by the MAS at the October meeting.       

 

Week Ahead – US jobs, ISM manufacturing and China manufacturing PMI    

  • USD: Nonfarm Payrolls – Citi: 5500k, median: 3000k, prior: 2509k; Private Payrolls – Citi: 5000k, median: 2800k, prior: 3094k; Average Hourly Earnings MoM – Citi: -2.2%, median: -0.6%, prior: -1.0%; Average Hourly Earnings YoY – Citi: 4.1%, median: 5.3%, prior: 6.7%; Unemployment Rate – Citi: 11.0%, median: 12.3%, prior: 13.3% - Following the unexpected increase in jobs in May, Citi analysts expect an even stronger rise in employment in June.  Average hourly earnings should decline further, a reflection of lower wage employment returning to company payrolls and the unemployment rate should continue to drop as well, reflecting a strong increases in rehiring but also tempered by further rise in the labor force participation rate.        
  • USD: ISM Manufacturing – Citi: 50.1, median: 49.3, prior: 43.1 – the ISM manufacturing index should rise just barely into expansionary territory in June with the largest increases likely in new orders and production as well as a solid bounce-back in employment. But the rapid gains seen in global PMI and US ISM measures (diffusion indices) merely reflect a very low bar for activity to be considered “expanding” rather than being a useful metric for mapping GDP growth.            
  • CNY: China Manufacturing PMI June: Citi Forecast 49.8, Consensus 50.4, Prior 50.6 – The manufacturing PMI could slide below 50 again in June. Coal consumption by power plants slowed from 16.9%YoY in May to 9.1%YoY while the blast furnace operating rate by steel mills nationwide only edged up 0.3ppt from May. The new COVID-19 cluster in Beijing and the floods in southern China are negative shocks while new export orders may remain at weak levels.      

 

This is is an extract from the Daily Currency Update, dated June 29, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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