FX
Risk rally takes a pause as investors reassess pace of the uneven global recovery amid 2nd wave fears
Posted onRisk rally takes a pause as investors reassess pace of the uneven global recovery amid 2nd wave fears
- USD: As the tactical risk environment continues to unfold, a more risk negative backdrop overnight with weaker performances in US, European and Asian European shares over the past 24 hours. This is in contrast to the day before when the risk rally extends on solid gains in Chinese equities and stronger US data (ISM services). Elsewhere overnight, crude prices trade in the red together with much of the base metals complex while the greenback advances modestly along with U.S. Treasuries prices. The catalyst for the overnight moves is likely positioning adjustments amid talk of the economic recovery slowing due to the recent uptick in US COVID infections.
- USD: Indeed, there are no improvements in US trends on Covid-19, with 21 states having reported the highest positivity rate in the last fortnight on Monday. Some state governors have been forced to roll back easing measures (further), which are slowing but not reversing the recent recovery. Globally, there is also more mixed news with Brazil starting to stabilize somewhat, despite President Bolsonaro testing positive, while Europe sees a second wave in the Balkans.
- USD: There is also movement on US-China tensions with Politico reporting President Trump is considering an executive order to curb special exemptions for Chinese businesses operating in the US, and another would target trade with Hong Kong. US Secretary of State Pompeo also says targeted visa restrictions are likely on the horizon for some Chinese officials.
EUR: Euro area - an uneven recovery?
- European Commission downgrades its euro area GDP forecast for 2020 to a contraction of -8.7% vs -7.7% previously forecast with risks remaining “exceptionally high and mainly to the downside.”
- But French activity levels in June and July are expected to be higher than those forecast a month ago, according to the Banque de France's (BdF) monthly business cycle update that also finds economic activity is probably -9% below its 4Q-19 level in June, up from -17% in May, -27% in April and -32% in March. BdF revises its forecast for French GDP growth in 2Q-20, expecting a fall of -14% QQ instead of -15% QQ in the previous iteration. Based on survey responses looking forward to July, BdF estimates that the loss of economic activity could be reduced again to 7%. If there were to be no progress in August and September, French GDP would likely rise by at least 14% QQ in 3Q-20, highlighting some upside risks to BdF's forecast of a -10% fall in GDP in 2020.
AUD: RBA sees less severe downturn but watch the 6 week Melbourne lockdown
- RBA leaves its base rate and 3yr bond yield target unchanged at 0.25% in its meeting yesterday. The economic assessment reconfirms that the downturn has been less severe than earlier expected, though the outlook remains uncertain and the recovery is expected to be bumpy. Notably, the RBA does not mention the latest coronavirus spread in Victoria nor are there any explicit warnings on AUD strength, despite larger references on the currency seen in the minutes of the June meeting.
- But the 6 week lockdown in Melbourne needs to be watched - Australia’s second-most populous state Victoria, announces a six-week lockdown across metropolitan Melbourne after 191 new cases are reported overnight, the worst figure yet.
EU’s Recovery Fund in focus; UK to announce further fiscal measures
- EUR: The Eurogroup meets tonight before an Ecofin meeting Friday to discuss the EU budget and the EU Recovery Fund ahead of the EC summit on July 17-18. Citi analysts base case is for the EU Recovery Fund to likely be broadly agreed upon relatively close to the EC draft. The “Frugal Four” (Austria, Denmark, Sweden and the Netherlands) need to be appeased but Dutch PM Rutte already seems to be in a compromising mood. Politico reminds there are five sticking points for the Recovery Fund - size, the timing, the conditions, national allocation criteria, and new revenue sources.
- GBP: UK government gears up for fiscal announcement tonight - Reports suggest the UK will unveil a further £2.7bn in investment spending on top of the £300m that had previously been promised during this FY. This comes alongside reports of a (1) temporary, industry targeted VAT cut of 2.5%, (2) an expansion to business rates relief (£6bn) and (3) increased support for hiring younger workers (£2bn). Citi analysts expect this to be just the first step, with further stimulus likely come the autumn.
- GBP: UK Construction PMI, June: Citi Forecast: 49.1; Prior: 28.9 – Citi analysts expect a sharp rebound in the construction PMI this month with many construction projects resuming work in June. Most residential construction firms have now reopened and major infrastructure projects have also resumed. However, longer-term outlook remains uncertain. More public investment may potentially provide some support, however a subdued recovery and elevated uncertainty is likely to weigh.
- CAD: Canada Net Change in Employment (Jun) – Citi: 900k, prior: 289.6k; Unemployment Rate – Citi: 10.9%, prior: 13.7%; Hourly Wage Rate – Citi: 7.2%, prior: 10.0% - Citi analysts expect a strong rebound in employment of 900k jobs in June following a somewhat surprising ~300k increase in May. That said, there is considerable uncertainty around the magnitude of job growth with these expectations are partly based on trends seen in US employment data.
- CNY: Citi analysts expect China’s FX reserves to rise notably by US$30bn to US$3,131.7bn in June. CPI inflation might have edged up to 2.6%YoY in June, and PPI deflation might have eased to -3.2%YoY. Citi analysts expect M1 and M2 growth to moderate to 6%YoY and 11%YoY in June and forecast new loans at RMB 1.5trn in June and envisage new TSF at RMB 2.3trn in June.
This is is an extract from the Daily Currency Update, dated July 8, 2020. Please approach a Citigold Relationship Manager if you would like more information.