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FX

Renewed demand for safe havens (JPY) as other geopolitical tensions rise

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Renewed demand for safe havens (JPY) as other geopolitical tensions rise 

  • Safe haven JPY, CHF & Gold:  A new risk event in the offing overnight as Russia's Putin meets urgently with his Defense Minister, US Vice President Pence cancels meetings to urgently return to the White House and the Council of the European Union Security Committee convenes an urgent meeting. The suggestion doing the rounds on Twitter is that this might be linked to an accident on a Russian Nuclear submarine though it may well be linked to Iran that has now violated the terms of the nuclear deal still in force between it and Europe (P5 +1 minus the US) and Russia.   

 

Short USD positioning and pushback from Fed speak on July rate cut to temporarily support USD; US June payrolls now key

  • Fed's Mester (hawkish, non-voter) pushes back on Fed rate cuts. Key highlights of her speech – (1) Cutting rates now would reinforce negative sentiment and proactively boost inflation; (2) Prefer to see more information before changing policy stance; (3) Economy still likely to perform well in 2019; (4) But ‘a few weak jobs reports’ would show base case shifting as recent mixed data suggests downside risks have risen. Bottom-line Mester is the 4th Fed official to push back on aggressive July rate cut (Powell, Kaplan and dove Bullard being the others so far).
  • NFP Preview – Will the US June jobs report (Friday) bring fireworks? The headline jobs number will be the most important aspect of the June employment report. Citi analysts expect 194k jobs added in June following a softer-than-expected 75K increase in May. While softer than +200K-average-monthly-pace reached in 2018,  average job gains in 2019 have been consistent with the still-solid 150-180K-per-month pace expected this year. Other aspects of the report are also likely to be supportive of a strong labor market, with average hourly earnings rising 0.3%MoM, and the unemployment rate unchanged at 3.6%.
  • The payrolls release will be a key input for the Fed’s decision in July. An upside surprise should lead to markets to price out some of the more-than-25bp of cuts priced for July while another weaker-than-expected reading would likely increase probability of a 50bp-cut in July. Bottom Line – Investors are short USD and vulnerable to an upside payroll surprise – led  squeeze that would see July rate cut prospects recede.  Note Citi analysts continue to think that the Fed will not cut rates in July.           

 

ECB in "no rush" to cut while IMF head Lagarde tipped to replaced Draghi; BoE’s Carney is dovish as Brexit risks continue to rise        

  • EURUSD pops higher to 1.1320 on a Bloomberg report quoting unnamed ECB sources that the ECB is in "no rush" to cut rates at the upcoming July 25 meeting with the article stating that the ECB may be leaning toward September when they’ll have updated economic forecasts. The ECB Council however may tweak its policy language this month to signal more stimulus is imminent. The article also highlights the timing of the Fed's meeting as a risk - a week after the ECB meeting and if the Fed cuts rates as expected -- the euro could surge against dollar. “That undermines euro-zone inflation by depressing import costs and weighs on growth by making the bloc’s exports more expensive".  
  • ECB President – Christine Lagarde is likely to replace Mario Draghi; EU Commission – Ursula Von der Leyen to replace Donald Tusk and EU Council President – Charles Michel to replace Jean-Claude Juncker. Bottom Line IMF’s Lagarde is generally seen as a dove and as former finance minister of France she has also advised on the EU crisis rescue and reform efforts. The leadership results bring about a knee-jerk dip of 15-pips lower in EURUSD, with investors zooming in on the potential implications of Lagarde’s selection which may also mean more influence for ECB staff members – especially the new chief economist Lane (who also leans towards more ECB stimulus).
  • GBP is the worst performer overnight thanks to UK construction PMI miss at a dismal 43.1 (vs. 49.2 expected). This is the biggest fall since Apr’09 with new orders dropping to the largest extent in over 10 years, while demand for construction products and materials falls at the sharpest pace since the start of 2010. The slide in construction demand is attributed to risk aversion in response to heightened political and economic uncertainty due to Brexit.  Remarks from BoE Governor Carney follow and help to keep pressure on sterling. Key highlights of his speech -  (1) It’s “unsurprising” that markets see lower bank rate as market gives more weight to “No Deal” Brexit; (2) BoE to reassess Brexit, trade risks in August; (3) BoE though still sees need for rate hikes if Brexit is  smooth.      

 

Australia – RBA cuts again, now in wait-and-see mode

  • RBA cuts rates by 25bp for the 2nd consecutive month to bring the cash rate to a new low (and lowest within commodity bloc) to 1.0%. RBA statement highlights – (1) Rate cut to help quicken reduction in unemployment, help achieve progress toward inflation target and make inroads into spare capacity; (2) Will adjust policy further if needed to support growth; (3) On the economy, sees tentative signs house prices are stabilizing in Sydney, Melbourne, the central scenario for the Australian economy remains reasonable, economic growth around trend as expected while inflation pressures remain subdued across economy though headline CPI is expected to pick up, boosted in Q2 by petrol prices (RBA sees underlying inflation at 2% in 2020).  
  • Bottom Line RBA is probably now more data dependent than the previous month when it cut rates for the first time and is in a wait and see mode. Market reaction (in AUD and bonds) post the decision also suggests the RBA is closer to being done (perhaps one more cut), if required. This may put a stronger floor in AUDUSD though upside still is likely limited on elevated geopolitical tensions notwithstanding the US – China trade truce at G20.       

 

This is an extract from the Daily Currency Update, dated July 3, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

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