Risk sentiment continues to consolidate amidst recovery prospects/ policy boost vs number of headline risks emerging
- GBP: A significant fiscal boost with more to come – Sterling gets a boost as the UK Chancellor notes the government is moving to stage 2 in its economic policy response to Covid 19 with a focus on stimulating demand and protecting jobs. In total, the discretionary easing announced overnight amounts to £23.4bn – roughly in line with Citi expectations. ‘Jobs, Jobs, Jobs’ – The largest announcement is a new grant for employers for holding onto previously furloughed workers until the start of 2021. Citi analysts think further support on labor costs is likely in autumn. But contrary to Citi expectations, the government chooses not to push ahead with a headline VAT cut but confirms a 6 month cut in the rate of VAT charged in the hospitality and leisure sectors. Citi analysts think a headline VAT cut remains a possibility if the recovery proves weaker than expected. More to Come – The overnight fiscal steps represent the first stage in a two-step plan – with further support likely in autumn (support for corporate investment and a possible cut to National Insurance Contributions). Citi analysts expect UK’s PSNB ex. Banks to reach £315bn (15.7% GDP) this fiscal year.
- USD: The selloff extends overnight though there appear to be few catalysts for the move. But a escalating US Covid-19 crisis seems to be gaining more market attention as California reports 11,694 new cases, the biggest daily jump, and gains in its positivity testing rom 6.8% to 7.1%. Meanwhile, Miami Mayor Suarez calls for a national or state-level mask mandate while his state, Florida, reports higher deaths and no improvement in case control. All this while, White House Economic Advisor Kudlow states most of the country is "doing rather well” and doubles-down against more shutdowns.
- USD: US election risk is also gaining more focus with presidential candidate Biden’s speech tonight in focus – a Bloomberg preview says Biden will likely call for a moderate approach toward to revive the US economy that includes spurring manufacturing and encouraging innovation and shelving for now the more ambitious proposals of progressive Democrats. His speech will likely cover 4 areas – (i) buy American and incentivize American jobs; (ii) clean energy; (iii) “caring” economy such as child-care, elder-care workers and domestic workers; (iv) racial equity. Comment – Biden’s move to the middle ground (rejecting policies of the more extreme left of the Democrat Party while projecting himself as a credible alternative to Trump could significantly enhance his prospects of winning – markets probably see this as USD negative for now.
CNY: China headline risks bear watching
- Comments from Trump’s chief of staff do the rounds overnight, saying President Trump is eyeing executive orders on China, in an apparent response to COVID-19. The likely escalation of US China tensions also serves as one of the key themes into the US presidential election in November. Some of the ideas include – (1) Possibly banning a popular social media/video platform owned by a Chinese company; (2) undermining the HKD currency peg. However the proposal faces strong opposition from others in the administration who worry such a move would only hurt HK banks and the US, not China: (3) Canceling a US-HK extradition treaty and ending cooperation with Hong Kong’s police; (4) US investments in Chinese equities with US Economic advisor Larry Kudlow saying investments in China are exposing retirees to “unnecessary economic risk” and channeling funds into companies “raises significant national security and humanitarian concerns”.
AUD: Melbourne’s hard lockdown will likely slow the national recovery
- The NSW state border closure with Victoria as Melbourne returns to Stage 3 restrictions for 6 weeks will likely negatively influence Q3 GDP. The greater Melbourne area represents around 20% of Australian national economic activity (total Victoria is 24%) and would mechanically reduce the pace of Citi analysts forecast GDP recovery in Q3 from 3.5% to 2.4%.
- Countering that is news that the Australian Treasury would introduce a “new phase” of income support for people impacted by the coronavirus crisis in its economic and fiscal update on July 23. Jobkeeper currently ends at the end of September, presenting a fiscal cliff and the comments are consistent with Citi expectations of more fiscal support.
Data for the remainder of this week – US jobless claims, Canada jobs
- USD: Initial Jobless Claims – Citi: 1350k, median: NA, prior: 1427k; Continuing Claims – Citi: 18700k, median: NA, prior: 19290k - Initial claims should decline slightly to 1350k for the week ending July 4, partly reflecting seasonal factors. Initial jobless claims will be more important to watch in coming weeks as Citi analysts look for signs of rising claims while continuing claims should fall again, to 18.7 million (seasonally adjusted), which is still a higher level than thought at the start of July. Still, as the strong 4.8 million increase in June payroll employment confirms, continuing claims alone are not the best indicator of employment trends presently.
- 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 9, 2020. Please approach a Citigold Relationship Manager if you would like more information.