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FX

Safe haven (JPY & CHF) sentiment weak but for more fundamental reasons; US data surprises to the upside but USD still weakens

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Safe haven (JPY & CHF) sentiment weak but for more fundamental reasons; US data surprises to the upside but USD still weakens                     

  • JPY: BoJ to have a deeper review at the October meeting - As expected, BoJ leaves its policy unchanged yesterday, but says it will review recent economic and financial developments more deeply at the next meeting scheduled Oct 30-31. This commitment to reexamine economic and price developments at the next meeting intensifies market speculation for a rate cut at the October meeting especially as the Bank adds it would not hesitate to take additional easing measures if needed. Citi analysts however doubt if a potential slowdown in consumer spending following the October sales tax hike would trigger a rate cut. In Citi’s view, the BoJ’s recent rhetoric appears more an effort to keep expectation for additional easing alive—in order to prevent unfavorable market movements—than a tangible prelude for additional easing. As such, Citi analysts stick to their view that the BoJ will likely maintain the status quo in policy unless USDJPY falls below ¥100/$.              
  • CHF: Counter to Citi’s base case expectations, SNB leaves rates on hold overnight but tweaks its calculation of negative interest rates on sight deposits by raising the exemption threshold for its tiering system from 20 to 25 times the minimum reserve. This lowers the effective lower bound for SNB policy rates and leaves the door open for further easing and Citi analysts expect a 10bp rate cut in December. The policy decision sees a knee-jerk strengthening in CHF against USD as markets interpret the SNB decision as “hawkish”. However, the 0.9908 level in USDCHF finds strong support.               
  • USD: US existing home sales rise 1.3% to 5.49m in August from 5.42m in July, contrary to consensus expectations of a decline to 5.38m and which adds to the improved picture for US housing. Median sales price of existing homes also firm somewhat and unsold inventory decline, both indicating a demand-driven increase. Existing home sales have now stabilized at levels lower than the late-2017 and early-2018 highs, but recent growth looks to be enough to provide potential for some upside in the contribution of housing to output growth in Q3. The Philly Fed manufacturing index for September also follows in the recent strength seen in US reports, rising to 12 versus 10.5 expected with gains seen across the board ex new orders. But USD weakens even against the backdrop of stronger US data that once again highlights that it is not the Fed, but US – China trade that is driving USD sentiment. Should a trade deal be concluded in October, that could see a significant reversal in current CNY/ CNH weakness expected to flow on to strength in other risk currencies within G10 and EM (commodity bloc, Asia EM and even EUR).             

 

GBP: BoE board meeting - Waiting For Uncertainty To Lift though sterling sentiment firmer ahead of EU October Summit  

  • GBP: BoE board holds rates steady overnight at 0.75% and balance sheet unchanged with a 9-0 MPC vote. Bad news – Bank highlights weaker global backdrop and Brexit uncertainty weighing on  business investment and its 3Q GDP forecast for UK edges down from 0.3% to 0.2% QQ. Good news – Pay growth is at decade-highs and unit wage cost is rising faster than is consistent with the Bank’s inflation target. In addition, the spending review for 2020/21 adds 0.4% to GDP over the forecasting horizon.         
  • GBP: In its monetary policy summary, the BoE differentiates 3 scenarios – (1) a smooth Brexit process (deal) and some recovery in global growth (Bank’s base case) the board expects to hike rates “at a gradual pace and to a limited extent”; (2) a no-deal Brexit – the board expects sterling to drop, inflation to rise and growth to fall. Citi analysts would expect swift rate cuts to near zero and a GBP50bn QE program; (3) If “political events lead to a further period of entrenched uncertainty” - In conjunction with weaker global growth, ”demand growth will remain below potential, increasing excess supply” and “domestically generated inflationary pressures would be reduced”. That makes a November rate cut possible if there is a Brexit delay without a clear path forward. Citi analysts would expect the Bank to hold in this scenario; (4) Citi analysts add a fourth scenario: What if the UK does not leave the EU at all (“Never Brexit”) - In a scenario where a Remain alliance wins an election and Labor’s Jeremy Corbyn becomes PM, Citi analysts expect a steeper upward Bank Rate path than in the deal scenario. But the MPC may wait until the decision to stay in the EU is confirmed, for example via a second EU referendum.
  • GBP: Brexit news flow – stepping up a gear or two - Reports overnight that the UK and Republic of Ireland are to meet for backstop talks as EU leaders give Boris Johnson just 11 days to present them with a new Brexit plan. Meanwhile, Simon Coveney, the Irish foreign affairs minister, says he is meeting regularly with numerous members of PM Johnson's Cabinet in a bid to thrash out a way to avoid a No Deal” exit At the same time, the DUP (Tories coalition partner) signals a possible compromise with DUP head Arlene Foster’s comments suggesting it could possibly accept a new Brexit deal which treats Northern Ireland differently to the rest of the UK, subject to conditions. And in a further sign of detente, DUP head Foster meets with Irish Prime Minister Leo Varadkar in Dublin overnight with duo agreeing to stay in touch. Finally, EC President Jean-Claude Juncker now thinks a Brexit deal can be reached by Oct. 31 (Sky News), warning a no-deal Brexit would be “catastrophic” for Britain and the EU and says if the objectives are met, all of them, then we don’t need the backstop”         

 

AUD: Australian jobs miss makes the October RBA meeting “live”          

  • AUD: Australia’s August jobs data misses estimates, with the unemployment rate rising to 5.3% (vs. 5.2% consensus and previous) and the 34.7k rise in headline jobs (consensus 15k) primarily driven by part-time jobs (+50.2k) while full time jobs fall -15.5k. The data sees Aussie rates shifting from November to a 25bp RBA rate cut in October (100% probability) and pricing a total of -35bps by year end (a 40% chance of another 25bp cut by December) while the move in  AUDUSD is a more modest 30 pip fall  – the employment data merely shifts timing than the quantum of rate cuts. Citi analysts now also expect RBA to cut the cash rate target by 25bps on October 1.
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This is an extract from the Daily Currency Update, dated September 20, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

 

 

 

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