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FX

Renewed risk aversion sentiment in play as fears of a potential adverse G20 outcome remain

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Renewed risk aversion sentiment in play as fears of a potential adverse G20 outcome remain  

  • Safe haven currencies (JPY, CHF and Gold): US/China trade developments overnight include the Section 301 Committee in the US convening a public hearing, discussing the potential implementation of USD300bn of tariffs on Chinese goods. Initial guidance is mid-May for these tariffs to be implemented after a 7 day hearing (should talks between Xi and Trump at the G20 end in failure).  WSJ also has comments from US Commerce Secretary Wilbur Ross over the weekend, who tempers expectations for a US/China deal at the G20 saying, “I think the most that will come out of the G-20 might be an agreement to actively resume talks,”…..“or new ground rules for discussion and some sort of schedule for when detailed technical talks might resume.”          

 

USD dips overnight ahead of Thursday’s June FOMC decision that may see the Fed no longer “patient” but now “closely monitoring”   

  • USD slips early in NY overnight on a soft NY Empire manufacturing survey, coming ahead of Thursday’s FOMC decision with the weakest general business conditions and first negative print since Oct’16 as well as the biggest MoM decline on record (drops in June to -8.6 vs +11.0 expectations and 17.8 in May with new orders down to -12 vs 9.7 prior). Overall, US data continues to show a mixed picture given still solid retail sales that reaffirms a still-healthy consumer, stabilizing industrial production and manufacturing, albeit at weaker levels but subdued inflation and inflation expectations (as highlighted by last week’s University of Michigan’s preliminary reading for May.  
  • Setting the stage for the FOMC meeting this week, market pricing remains close to 3 full rate cuts. Citi analysts expect the Fed to put the option of rate cuts clearly on the table by “closely monitoring” global developments but the base case remains that cuts may not be warranted this year. However, the Fed statement may also indicate the committee is ready to “act as appropriate to sustain the expansion,” pointing to the potential for a rate cut. Many 2019 “dots” will also likely drift lower but the risk is for a median dot for 2019 that does not show cuts (ie a flat trajectory).    
  • In Japan, Citi analysts expect BoJ to leave policy unchanged through 2019 (despite market talk of a possible 10bp rate cut this week). On Thursday, Citi analysts estimate Japan nationwide core CPI at 0.7%YY in May.            

 

Italy risk and Draghi’s speech put euro sentiment on hold for now; UK politics leaves sterling vulnerable   

  • EU-Italy negotiations continue over the weekend with latest reports from Corriere della Sera claiming that Italy will ask the EU to revise its budget rule in an upcoming letter. Bloomberg adds that "the letter may list the measures planned for reducing the deficit in 2019 but may not mention any plan for 2020”. PM Conte and Finance Minister Tria may count on the plan for 2019 as being enough to avoid an infringement procedure for the country’s excessive debt or at least delay it until autumn. 
  • Ireland won’t budge on backstop - Over the weekend, Irish PM Leo Varadkar insists that Ireland will not allow the Northern Ireland "backstop" clause in Britain's EU withdrawal agreement to be dropped because doing so would be as big a threat to the country as Britain leaving without a deal. The Irish PM says that while it is "alarming" that leading contenders to replace Theresa May as UK's PM are increasingly threatening a “No-Deal” Brexit, Ireland is 100 percent certain the EU would not allow the backstop to be removed. Bottom Line: 2 scenarios – (1) A disorderly Brexit with perhaps a short and final “technical” extension up to January 2020 at which point, the UK leaves the EU  under a "controlled No Deal"; OR (2) UK government likely falls under a “no confidence” motion as it tries to push through a “No Deal” and fresh elections ensue that raises the prospect of a Jeremy Corbin led Labor government  - neither alternative is seen as being supportive for sterling.      
  • This week, Citi analysts expect UK retail sales at -0.5%MM, UK CPI at 2.0%YY, German manufacturing PMI at 45.2 and euro zone manufacturing PMI at 48.5. Markets also await ECB President Draghi’s speech tonight at Sintra. This week’s BoE meeting may see up to two dissenting votes but an August rate hike is no longer base case as dovish winds blowing through global monetary policy has tilted balance against a 2019 BoE rate hike and as cliff-edge Brexit risk looms.        

 

NZ growth downgraded but inflation seen picking up; Oil prices now seen better supported and add to CAD resilience    

  • The Quarterly Consensus Survey of Economists features lower growth estimates for NZ with surveyors lowering their 2019-2020 estimate from 2.8% to 2.5% but leaving 2020-2021 unchanged at 2.9%. On the NZ inflation front, they see broad levels picking up to 2.0% by Q1 2020 and wage inflation of 3.4% in 2019-2020.  The survey results come ahead of this week’s NZ Q1 GDP (Citi looks for economic activity to have expanded by 0.5% in Q1’19, marginally weaker than the respectable 0.6% recorded in Q4 2018 but to produce a year-ended growth rate of 2.3% still a relatively solid result).  
  • WTI closes at $52.61 on Friday, for the first time since Nov’18 with Citi positioning indicators now pointing to plenty of bearishness likely baked in. Meanwhile noise around further OPEC+ production cuts appears to be gathering with Saudi Arabia hoping to extend production cuts (Bloomberg). Saudi Arabia’s Energy Minister also tells reporters that "OPEC+" will likely meet during the first week of July and is "fairly confident that the fundamentals are going in the right direction” to see an extension of cuts. Canadian data releases this week should also reaffirm a solid domestic picture that makes rate cuts from the BoC unlikely. Headline CPI should rise 2.1%YoY in May but core should remain around, but just below, 2%. Meanwhile, retail sales should also increase modestly.  

 

  • This is an extract from the Daily Currency Update, dated June 18, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

 

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