Risk aversion extends as markets focus on data and global growth prospects

• Market remains focused on data and global growth prospectus. 1) ADP employment change was weaker than expected. Though not nearly as important as Friday’s nonfarm payroll number, markets appear to be hypersensitive to any negative information for the US given the recent miss in Manufacturing ISM. 2) Trade headlines in Europe – WTO confirms the go-ahead for US to impose tariffs on as much as USD7.5bn worth of European exports annually. 3) UK PM Boris Johnson announced his new blueprint for a Brexit deal, saying a no-deal Brexit would be a “failure of statecraft” and threatening to walk away if the bloc does not engage.

• USD: Traded lower on the day as investors remained focused on weak US data and the prospects for the Fed to cut again in October. The ADP Employment Change was 135k for the month of September against an expectation of 140k. The risk for markets on Friday could be if the nonfarm payrolls number for September surprises to the downside, as this may increase concerns on whether weakness in the industrial sector may be spreading to the broader economy. Citi analysts expect 155k jobs to be added in September, consistent with still-solid overall activity, and this is likely to lead the Federal Reserve to forego additional easing at its October meeting. Markets have moved to price in around 17bps of cuts at the October FOMC and a further 16bps at the December meeting.

• EUR:Trade headlines – but for Europe. The WTO has confirmed President Trump has the go-ahead to impose tariffs on as much as USD7.5bn goods from October 18 in retaliation for illegal subsidies to Airbus. The USTR will impose a tariff of 10% on large commercial aircraft and 25% on agricultural and industrial goods. While the amount may be considered somewhat modest, the broader takeaway is that US/EU trade tensions risk souring. A final list of goods is likely to be announced shortly.

• JPY: Large mover among G10 currencies, largely reflecting global growth concerns. USDJPY was down 80pips towards 107.10 from the London open, with roughly 60pips of that fall seen in NY trading.

• CAD: Posted large losses against the dollar overnight after an EIA report showed that crude inventories rose to the highest level since May. USDCAD rose 0.71% overnight as WTI crude oil dropped 2.05% to $52.53 per barrel.

GBP: Brexit updates continued

• GBP: Another choppy day and finished relatively flat against the dollar. UK PM Boris Johnson used his conference speech to announce what he described as “constructive and reasonable” UK proposals to replace the Irish backstop (informally named “2 borders for 4 years”). European Commission President Junker gave a first impression of Boris Johnson’s current Brexit plan after reports stated it was being rejected outright by Ireland. The official statement remarks that the plan represents a positive step but also noticed the serious lingering issues over the Irish backstop.

• GBP: Data continues to show the damaging effect of rolling Brexit uncertainty. In a fifth consecutive month of contraction, UK construction PMIs have fallen to 43.3, missing estimates of 45.0. This follows the manufacturing PMI report the day before that showed Brexit stockpiling. All together, it suggests downside risk to Thursday’s services PMI which could fall into contraction territory.

KRW: Politics in play

• KRW: Also one of the worst performers globally. North Korea’s missile launch remains in conversation given geopolitical risk but more importantly, weak local and global manufacturing data is also weighing on the currency.

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