Risk sentiment ends mixed but USD weakness extends

Risk sentiment ends mixed but USD weakness extends                                                    

• USD: Markets shift focus overnight from the positive fiscal cheer and new vaccine hopes to negatives - US – China tensions, US fiscal stimulus delay and President Trump’s warning that the COVID crisis could get worse. This sees a mixed response from markets overall with negative performances in Asian and European sessions followed by US stocks up moderately while USD extends its losses against all (ex JPY and CNY) and Gold continues its climb.                         

• USD: USDCNH jumps to the 7.00 handle on headlines that the US State Department has ordered the Chinese consulate closed in Houston “to protect American intellectual property and Americans’ private information.” It is not clear how this situation is going to develop but Reuters suggests that China could close the US consulate in Wuhan as retaliation. Bottom Line - This remains a fluid situation but has limited economic implications for now but does add incrementally to the already rising tensions between the US and China.     

• USD: Dovish signals from the Fed further undermine USD sentiment - a Wall Street Journal article suggests that Fed officials would no longer look to pre-emptively raise rates to prevent inflation going above the 2% target, and instead would look to have inflation average 2% over a certain period of time. This causes little change in FOMC pricing (that are already pricing negative rates for the Fed in 2021) but adds to the incrementally dovish signals coming from Fed officials of late despite the rebound in US data seen in recent weeks.    

• USD: US law and order issues add to the negative tone in USD - Two more US cities are on watch for civilian-law enforcement agencies - Chicago, Illinois and Albuquerque, New Mexico. In what President Trump says is a response to violent crime, he will send federal law enforcement officials to both cities. Chicago Mayor Lightfoot expresses cautious opposition while Democratic Senator Martin Heinrich in New Mexico criticizes the move. ü      

Risk sentiment still weighted towards the positives despite the mixed tone overnight      

• The current risk on backdrop is encouraging longs in EUR, GBP and the Commodity Bloc versus JPY. This comes on the back of China’s economic resilience, fiscal cheer from the euro zone and Australia 9and eventually the US), continuing Brexit talks and above all, new vaccine hopes.   

US home sales data continues to strengthen but has little impact on USD                                            

• USD: Existing home sales follow other housing data higher – US existing home sales rise to 4.72 million (annualized) in June, from a May low of 3.91 million though overall, total sales are down 11.3%YoY. The rebound in existing home sales will mechanically lag the almost-complete rebound now evident in several housing activity metrics, given that existing homes are only counted as sold when a contract closes. Consequently, the partial rebound in June should continue into July.

Brexit - ‘Little progress’ in weekly talks but GBP hardly flinches as talks set to go into August and talk of more FTA deals seen in the offing 

• GBP: Reports overnight point to stalled Brexit negotiations with EU officials complaining the talks are ‘going round in circles.’ Intensified weekly talks will end on Thursday, but with further negotiations now scheduled for August. Reports suggest the EU is waiting for the UK to reciprocate on previous EU compromises. The Telegraph reports that the UK governments central planning assumption in some areas is that a deal will not be reached. However British officials now reportedly expect talks to continue into the autumn with Citi analysts and markets expecting a rudimentary deal, to be agreed by the autumn. Indeed, late in the London session overnight, the Guardian newspaper attempts to infuse some optimism saying Brexit negotiations have not broken down (according to No 10 sources) and a fifth round of talks will go ahead as planned next week, with another round scheduled for August unless otherwise agreed.                      

• GBP: UK government says it will not be able to reach a trade deal with the US ahead of the November Presidential election. A third round of talks are set to begin next week but reports suggest that discussions have been slowed by both delays to the Brexit negotiations and the Covid-19 crisis.  The key issues remain protections on public services procurement – particularly pharmaceuticals – and access for American agri-food products. This comes as the UK continues to try and roll over EU trade deals with other third countries before the end of the year. So far the UK has rolled over trade deals with only a relatively small number of countries – including South Korea. Intense negotiations are ongoing with several others – including Japan.

Commodity Bloc: AUD - June’s solid retail trade gain should be repeated in July; CAD - Stronger June CPI does not change accommodative stance

• AUD: Australian headline retail sales are up 2.4% in June, a solid gain, building on the 16.9% gain in May. Citi analysts believe that JobKeeper and the JobSeeker supplement have been the key drivers for the rebound, so the recent decision to extend these support programs is welcomed. Citi analysts also expect July retail trade to be strong, notwithstanding the return of a hard lockdown in Melbourne that is likely to influence around 20% of retail trade. 

• CAD: Canada’s headline CPI is up 0.8%MoM in June, stronger than consensus for 0.4% and Citi’s above-consensus 0.6%. This brings the year-on-year reading to 0.7%. The core measures are also slightly stronger on average. But Citi analysts do not take one month of stronger-than-expected CPI as an indication of inflationary pressures, and still see overall downside risks for core inflation measures this year given soft demand.          

This is is an extract from the Daily Currency Update, dated July 23, 2020. Please approach a Citigold Relationship Manager if you would like more information.