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Japan Q1 GDP headline much stronger than expected but return of Huawei risk adds to negative risk tone

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Japan Q1 GDP headline much stronger than expected but return of Huawei risk adds to negative risk tone   

 

  • Despite the surprise stronger preliminary Japan Q1 real GDP print on Monday, risk sentiment is lower to start the week with equity weakness picking up momentum in the last few hours in the NY session overnight. At 0.5% QoQ and 2.1% QoQ annualized, Japan Q1 GDP clearly overshoots consensus for -0.1% QoQ and -0.2% QoQ annualized. Behind the positive surprise lie several factors that include 1)  business investment decreases less than the market had expected, 2) inventories contributed positively to GDP growth, contrary to expectations, and 3) net exports add slightly more to GDP than expected, because imports plunge 4.6% QoQ     
  • Still, the relative calmness belies continued hawkish rhetoric around the Middle East and no further developments on the US/China trade front. Indeed, the return of Huawei risk (and any subsequent fallout) suggests that there’s still room to price in trade tensions. From Citi analysts' recent Beijing trip notes, the US action on Huawei is seen "as a particularly aggressive escalation, and may make it harder for President Xi to come to the negotiating table." Traders though still hope that some trade progress can be made at the G20 meeting next month as negotiators still regroup from the breakdown 2 weeks ago.                                 

 

FOMC Minutes the focus this week – Citi analysts expect no rate cut signals to emerge from the Minutes    

  • In the US, trade headlines on multiple fronts will likely continue. The US Treasury also releases its FX Report on currency manipulation soon, and the lack of an agreement in US-China trade negotiations could lead to a tougher stance against China. Data wise, Citi analysts expect durable goods orders on Friday at -2.0%MM (consensus -2.0%MM).   
  • But this week’s focus will likely be on the Fed FOMC meeting minutes Wednesday that may give clues on portfolio weighted-average maturity and a possible future cut to IOER. And while the Minutes should still make it clear that low inflation - and inflation expectations - remain a concern, any explicit discussion of cuts would be a dovish surprise. Citi analysts continue to expect no Fed rate cuts in 2019 in contrast to the more than 25bp priced in by the market.      

 

PM May expected to make a "bold offer" on Withdrawal Bill  

  • UK cabinet ministers face a showdown this week over how to get PM May’s Brexit deal through at the 4th attempt (in the week commencing June 3). PM May is expected to warn ministers they may have to agree to a temporary customs union to secure enough Labor votes to pass the Withdrawal Agreement Bill. Ministers will also likely debate whether to allow Labor’s demand for the UK to continue to accept new EU laws on workers’ rights and environmental standards after Brexit. Meanwhile, opposition Labor leader Corbyn has moved closer to fully backing a 2nd Brexit referendum.
  • Bottom Line - Sterling has become a “sell on rallies”  with all eyes on the UK parliament vote on PM May’s 4th attempt to get her Withdrawal Bill passed. If the Bill is defeated this time, PM May is likely to resign and the chances of a hard Brexiteer such as Boris Johnson as the new PM would likely escalate the chances of a “No Deal” withdrawal – a negative outcome for sterling.         
  • This week in Europe, EU Parliament elections will be held Thursday-Sunday. All eyes will be on UK and Italy (the latter as Italy deputy PM Salvini has repeatedly said he is prepared to see Italy break EU borrowing limits). Data wise, Citi analysts expect euro zone manufacturing PMI at 48.8, German manufacturing PMI at 44.0 and German ifo expectations at 94.0.       

 

Upside for CAD versus downside for AUD  

  • Canada: Oil is bid overnight even as the JMMC and Saudi issue statements seemingly committing to constraining supply for the remainder of the year under the terms of the current agreement. However, Russia suggests a potential relaxation of the curbs and wants to see what the next month brings with a “range of options” likely to be discussed at the June meeting. Iran also continues to face pressure from both Saudi and the US, warning that they will not back down from Iran. This week, sees a key data points necessary to track Canadian Q1 real GDP growth while Canadian retail sales should rise a strong 1.1%, with most of the boost coming from gas sales.    
  • Australia: A surprise election win for the Conservatives sees AUD rallying to a high of 0.6938 with buying seen from leverage and real money accounts. However, there seems to be no lasting support for AUD from this as the election result is unlikely to change the fundamental AUD overhangs around housing, beta to China and the prospect for RBA rate cuts ahead.     

 

PBoC verbal intervention makes break above 7.00 unlikely  

  • RMB is supported yesterday following an interview from PBoC deputy governor Gongsheng, providing reassurance, saying - “we have the confidence and capability to maintain FX market stability, as we have accumulated rich experience and policy tools in facing FX market volatilities, and will adopt necessary counter-cyclical adjustment measures and enhance macro prudential management.”  
  • Citi analysts agree that the PBoC may prefer to keep USDCNY below 7.00 for now even if allowing RMB to weaken past 7.00 helps mitigate tariff impact on export and potentially sends negative shocks to US risk assets. But a move past 7.00 also risks de-anchoring FX expectations of the real economy, which is likely to induce higher capital outflow pressure.             

 

  • This is an extract from the Daily Currency Update, dated May 21, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

 

 

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