Risk Aversion Spikes on US-China Tensions

Risk aversion spikes on US-China tensions       

• While the general investor consensus is that rising trade tensions are ultimately USD-negative (as was the case when tensions initially flared), the reaction overnight is one of a spike in risk aversion with USD and JPY outperforming the rest and with commodity currencies (especially AUD & CAD) faring the worst. With headlines driving day to day moves, this makes it difficult to form a consensus on the USD outlook as the initial knee jerk reaction may ultimately give way to dollar selling.

EUR & GBP: ECB President cautious on euro zone outlook citing temporary factors, BoE unlikely to hike at tomorrow’s meeting                    

• While President Draghi’s overall tone at the Sintra meeting is one of caution on the euro zone outlook, he sees this partly related to supply-side factors, some of which are temporary and have already subsided, such as the cold winter weather. But there may also be broader supply factors at play, particularly, increasing signs that capacity constraints are starting to bind in some countries and sectors (and potentially more inflationary). Draghi notes capacity utilization stands above its long-term average in the euro area and in all large economies and the question is “how much, and how quickly, firms will be able to increase supply to relieve these limits".

• BoE meeting: Further hawkish surprises are possible, but imminent political uncertainty and some data disappointments, in particular on wages, give an incentive to wait for a few more weeks until the August meeting. The Carney speech at Mansion House later on Thursday could offer further insight.

Commodity Bloc: RBA June Minutes more upbeat

• The RBA sees early indications for 2Q growth suggest business conditions at a post-2008 high and notes it had expected 1Q growth of at least 2.75% only for the data to show 3.1% annual expansion. The RBA sees infrastructure investment likely to continue to support growth for “some time” and exports of resources used in renewable energy -- copper and lithium – to also contribute to growth. It notes wage pressures building in US and Japan that are expected to lead to a lift in inflation and says that while the outlook for domestic consumption growth continues to be “a source of uncertainty” as income growth is slow and debt high, it now sees more evidence of firms having difficulty hiring workers with right skills and wage pressures building in some parts of the economy.

This is an extract from the Daily Currency Update, dated 20th June 2018. Please approach a Citigold Relationship Manager if you would like more information