A risk aversion spike overnight as President Trump quashes hopes for a fiscal stimulus deal

A risk aversion spike overnight as President Trump quashes hopes for a fiscal stimulus deal         

• USD:  President Trump declares an end to fiscal stimulus initiatives until post-election - the announcement comes as a surprise, spurring declines in US equities and yields while USD reaction is more muted. In tandem with risk-off, G10 commodity currencies (AUD, NZD & CAD) and other FX risk assets underperform. Bottom Line - As fiscal stimulus is contingent on bipartisan agreement, it looks like this is it. Over the last week, hopes for a fiscal stimulus breakthrough had been supporting markets therefore there lies room for a further correction in risk assets.                  

Sterling weakens as risk aversion on stalled US fiscal hopes dominate Brexit noise  

• GBP:  A see-saw battle (once again) with cable finally finishing lower sub 1.2900 as quashed hopes for a US phase 4 fiscal package dominate Brexit noise. And noise it is with initial Brexit headlines negative  - “EU to ignore October 15 Brexit deadline, betting UK will back down”. This is subsequently overtaken by Reuters reporting that – “latest round of EU – UK talks are one of the most positive so far with big progress on issues including social security…….we are getting closer to a deal despite No-deal rhetoric, final decision will be in PM Johnson’s hands” (EU sources). BBC reporter Kuenssberg also reports the EU negotiating team will be going to London today and EU chief negotiator Michel  Barnier is likely to visit late Thursday for talks on Friday.        

RBA dovishness dominates a solid Federal budget leaving AUD weaker 

• AUD: No rate cut for now but the RBA leaves with an easing bias - RBA decides to leave rates unchanged at its meeting yesterday (contrary to market pricing for a 15bp cut). The Board however continues to “consider how additional monetary easing could support jobs as the economy opens up further”. This sentence is new and markets see it to be dovish.

• AUD: The Australian Federal budget is more expansionary than previously expected with Citi analysts estimating just over $AU41bn in new stimulus measures since July’s mini-budget. Most of this is directed at accelerating domestic demand growth via new tax cuts, wage subsidies to hire unemployed workers and business based tax incentives to prevent a fiscal-cliff early next year. There is also infrastructure spending to the tune of AUD14bn in new and accelerated projects over the next four years. For the RBA, the stimulus for the business sector in particular is new and creative, perhaps the reason why the RBA has not cut rates further for now.     

Data releases overnight – German factory orders, US trade balance

• EUR: German factory orders now just 3.6% below pre-crisis level - German factory orders take another big step towards completing their post-lockdown recovery with a 4.5% MM jump in August (consensus and Citi 2.8%), extending the recovery which started in May. August orders are now just 3.6% below the (pre-lock-down) February level and 2.2% below August 2019. Domestic orders rise 1.7% MM, foreign orders are up by 6.5%, with orders to the rest of the euro zone up 15.6% and the rest of the world up 1.5%. By sector, the statistical office highlights that automotive orders gain 0.9% MM and are 0.3% above the February level, while machinery orders jump by 11.4% MM but still 5.8% below February.     

• USD: A widening US trade balance may reflect stronger US activity - US trade balance widens in August to -$67.1bn from -$63.4bn in July. Good exports rise 3.0% and goods imports are up 3.3% while services exports also rise 0.3% and services imports are up 2.3%. The widening trade deficit over the last few months will likely mechanically weigh on US Q3 real GDP after net exports gave a slight boost to growth in Q2.  Overall though, Citi analysts see the widening trade balance as a positive sign for US activity as imports rebound faster than exports.   

Data/ events for the remainder of this week   

• USD: FOMC Minutes and Fed speak- Forward guidance in the post-meeting statement at the September FOMC was changed to reflect the new long-run goal of achieving 2% inflation on average. The debate around the exact wording may be helpful about eventual plans for liftoff (which, for most officials, likely occurs around 2023 end). Markets will also watch for guidance on potential changes to asset purchases. Fed speak includes  Williams to discuss Flexible Average Inflation Targeting and Evans to discuss US economy and monetary policy.  

• EUR: Bank of France Business Sentiment, September: Forecast: 103, Prior: 106 - In August, the BdF survey reported a 7-point gain in manufacturing sentiment to a 39-month high, but also a 3-point gain in services and a one-point gain in construction. Citi analysts would be surprised if the manufacturing confidence measure did not fall back somewhat in September, but remained above its long-term average of 100. The team currently estimate French 3Q real GDP growth to be around 16% QQ, translating into a 6% YY drop in real GDP compared to the -19% decline in 2Q-20. 

• CAD: BoC Governor Macklem will speak on Thursday at the Global Risk Institute, with the topic “Securing the Future in Uncertain Times”. Given rising virus case counts over the last few weeks since the BoC’s last meeting on September 9, the speech could have somewhat of a dovish lean.  

• CAD: Net Change in Employment (Sep) – Citi: 190k, median: 137.5k, prior: 245.8k; Unemployment Rate – Citi: 9.7%, median: 9.9%, prior: 10.2%; Hourly Wage – Citi: 5.5%, prior: 6.0% - Canadian employment should rise by 190k jobs in September, continuing a streak of solid, but slowing job gains that has already reversed close to 65% of the jobs lost over March and April. The unemployment rate should fall to 9.7% with a continued modest increase in the participation rate, which has persistently risen back toward pre-COVID levels over the last few months.         

This is is an extract from the Daily Currency Update, dated October 7, 2020. Please approach a Citigold Relationship Manager if you would like more information.