Narrowing optimism differentials with the US - fiscal cheer in euro zone and Australia sees EUR and AUD break to new highs vs USD

Narrowing optimism differentials with the US - fiscal cheer in euro zone and Australia sees EUR and AUD break to new highs vs USD                                                

• EUR: The EU Recovery Fund compromise deal totals €750bn (unchanged) with grants €390bn (down from €500bn) and loans €360bn (up from €250bn). 70% of grants are to be committed in 2021 and 2022 according to GDP per capita and unemployment rate deviation in 2015-19 (unchanged) and 30% in 2023 according to 2020 GDP hit (new). On surveillance – Dutch PM Rutte and the frugal 4 do not get a veto. Instead, there is an 'emergency brake' that allows any member state to raise concerns that another may not honoring promises of reforms - this can temporarily halt disbursement of funds. Yet the mechanism is time limited, aiming to be resolved within three months of the complaint, and the final decision lies with the EU Commission. This is significantly less powerful than a single country veto and adds to the positive sentiment in EUR.                     

• AUD: Fiscal cliff avoided? The Australian government announces it will extend its flagship wage subsidy program beyond the end of September, avoiding fiscal cliff concerns. As for first details, PM Morrison says JobKeeper will have two tiers from the end of September to better reflect the hours people work. All in all, the cost of extending the two programs will total about A$19.8 billion, Treasurer Josh Frydenberg says. Citi analysts - JobKeeper/Seeker extension avoids risk of a hard landing as fiscal assistance to households will now continue for longer (a 6 month extension to JobKeeper to the end of Q1 2021, while the JobSeeker supplement is extended for 3 months). The Treasurer will provide an updated budget and economic outlook on Thursday. Citi analysts expect the Treasury to reduce the severity of the forecast recession, although there is still likely to be a significant loss of output in 2020.  

• USD: In the US, fiscal stimulus may be delayed on payroll tax cut clash - Citi analysts continue to expect the US Congress to agree to a USD1trn package (in line with Treasury Secretary Mnuchin’s comments overnight). Top demands from Democrat include extension of extra unemployment benefits (a question for markets as well) expiring at month-end, as well as  direct state and local government funding. But Democrats are also strongly opposed to Trump’s payroll tax cut proposal - Trump says this is a must have but some Republicans also express concerns. How long is likely the wait? Republican Senate Majority Lead McConnell advises that its party’s plan will “hopefully” come “as early as this week.” But the payroll tax cut, although being discussed by the White House, has received little traction in Congress and while it cannot be ruled it out, it is unlikely to be part of the bill. This could drag negotiations for the next couple of weeks.        

GBP: A solid rally in sterling as BoE chief economist Haldane sees ‘so far so v’; Brexit agreement more likely late August/ September than July      

• Speaking to the Treasury Select Committee, Andy Haldane (BoE Chief Economist) notes that the UK economy has been growing by around 1pp per week on average over the last 10 weeks. If true this would mean the UK economy had clawed back around half of the initial reduction in activity associated with the lockdown. Haldane now says he expects a fall in GDP of around 20% QQ compared to -28% in the Bank’s illustrative scenario in May. In concluding, Haldane comments that while so far it has been a v-shaped recovery in the UK, ‘that of course does not tell us where we may go next.’ On employment, Haldane comments that the tax data suggests a material increase in unemployment to around 6%. On negative rates Haldane notes that these could encourage further borrowing, though there remained downside risks to bank’s margins. 

• The Sun reports Britain may be ‘close to abandoning the Brexit trade deal’ with PM Boris Johnson’s deadline just days away. Sterling however does not flinch  as even though many government ministers now assume there may not be a deal, it is still likely that a "basic" agreement could be reached if the EU gives ground in the autumn, senior sources reveal. This looks to be discounted into sterling sentiment.     

Commodity Bloc: An added boost to AUD as RBA sees no cause for FX intervention; CAD May retail sales rebound and should continue in June                                            

• AUD: RBA minutes sees board members agreeing that there is no case for intervention in the foreign exchange market, given its limited effectiveness when the exchange rate is broadly aligned with its fundamental determinants, as at present. Members also agree that negative interest rates in Australia remain extraordinarily unlikely. On bond purchases, the RBA notes that the government bond markets are operating effectively and the yield on 3-year Australian Government bond remains at the target of around 25 basis points. Given these developments, the Bank has not purchased government bonds for some time, although it is prepared to scale up these purchases again, if necessary, to achieve the yield target and ensure bond markets remain functional. In comments following the RBA minutes, Governor Lowe sounds constructive on the Australian economy though noting that the Bank hasn't yet modelled the impacts of the Victoria lockdown.                     

• CAD: Canada’s retail sales in May are up 18.7%MoM, just below consensus for 20.0% and Citi at 21.6%. Excluding autos however, sales exactly match Citi’s expectations for a 10.6% rise. The strong rebound in retail sales seems consistent with other activity data in May, reaffirming that a bottom in activity was likely reached in April. Citi analysts expect a continued increase in spending over the next few months, but the outlook for consumption toward the end of the year and in 2021 is likely to become more uncertain. Meanwhile, Statistics Canada provide an initial estimate of a strong 24.5%MoM increase in June retail sales, which would take total retail sales to 2% above the level of sales last June, similar to June US retail sales at +1.1%YoY.        

This is is an extract from the Daily Currency Update, dated July 22, 2020. Please approach a Citigold Relationship Manager if you would like more information.