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FX

Safe havens bid as nervousness builds about US – China relations; No recession in Germany as euro zone economy likely troughs

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Safe havens bid as nervousness builds about US – China relations;  No recession in Germany as euro zone economy likely troughs   

  • Safe Havens (JPY, CHF & Gold): Market sentiment remains nervous overnight with USDJPY once again back below 108.50 as investors await see ongoing uncertainty in US – China trade relations. Key highlights overnight – (1) No definitive news on US – China trade but repeat commitments from leading Republicans to advance the Hong Kong bill and President Xi’s warnings on the matter do not help. (2) The deterioration comes hot on the heels of comments from President Trump on Thursday once again threatening further tariffs, saying “If we don’t make a deal, we’re going to substantially raise those tariffs. They’re going to be raised very substantially. And that’s going to be true for other countries that mistreat us too.” Importantly, he gives no timing for the potential signing of the phase one deal, or whether the US would roll-back tariffs.          
  • EUR: Euro zone GDP shows a growth rate of 0.2% QQ in 3Q-19. Meanwhile, Germany manages to avoid a recession and none of the euro area member states sees a negative GDP print. The  latest survey data also suggests growth will remain around these levels in 4Q-19, slightly below potential. Key details (1) Euro area real GDP growth is confirmed at 0.2% QQ in 3Q-19, up 1.1% YY (lowest since 4Q-13); (2) Country splits show that all post a gain in real GDP, ranging for the largest euro area member states from 0.1% QQ in Germany (technically avoiding a recession on consumer spending) and Italy, to 0.3% QQ in France and Portugal, 0.4% QQ in the Netherlands and Belgium, and 0.5% QQ in Finland; (3) Employment rises again in 3Q-19 albeit modestly (+0.1% QQ, with the 1.0% YY gain suggesting that productivity growth is finally turning slightly positive. Private and public consumption also rise. Also as expected, a rise in exports while imports are steady delivers a positive contribution from net exports.
  • EUR: Bottom Line – The positive GDP data likely represents a double – edged sword and perhaps explains why the euro has not rallied much in reaction to the data and Bund yields have not lifted. On the one hand, the positive data shows a euro zone recession now seems unlikely as the economy could start to see more positive dynamics in 4Q-19 with tentative signs in confidence indicators that the pace of decline in German manufacturing is starting to stabilize with improvements also expected in countries such as France. On the other hand, the data also diminishes prospects for a substantial fiscal easing from euro zone governments at least for now that is likely required to significantly boost euro zone inflation expectations and EUR.       

 

GBP: UK October retail sales miss but still above long run average                       

  • GBP: Ignores the overnight miss in UK retail sales even as the BoE at the latest MPC flags risks of uncertainty spilling over onto the UK consumer. Key highlights – (1) Growth in retail sales underperforms expectations in October, with sales excluding auto fuel growing at -0.3% MM (Consensus 0.2% MM, Citi 0.2% MM), compared to 0.2% MM in September with weakness relatively broad based.  (2) But as with most recent UK data, retail sales are above long run averages – Y-o-Y growth (including Auto Fuel) is now 3.1% YY and above long term averages (Q1-2012 to 2Q 2016, average was 2.5% YY).

 

Commodity Bloc: Weaker October jobs data won’t spook RBA; RBNZ Governor Orr’s optimism suggests no further rate cuts  

  • AUD: Underperformance in AUD yesterday reflects a weak Australian October jobs report. Key highlights – (1)  Employment falls 19k in the month, the weakest monthly result since September 2016 and against consensus for a 15k gain. The unemployment rate moves a notch higher from 5.2% to 5.3% even as the participation rate falls from 66.1% to 66.0%. (2) The trend unemployment rate remains at 5.3% for the fourth consecutive month. Furthermore, the 3-month rolling unemployment rate is also 5.3% -both identified by the RBA as important for gauging labor market strength. (3) Outlook for the labor market - Leading employment indicators point to an unemployment rate of around 5¼%. Although this would likely remain above the RBA’s mid-point 4½% estimate for the natural rate of unemployment (NAIRU), such a rate is consistent with the RBA’s forecast till the end of 2020.  (4) Implications for monetary policy – Citi analysts do not believe the data will result in an RBA interest rate cut in December, particularly as the RBA believes the economy is at a gentle turning point. Citi analysts expect the next (and final) RBA 25bp cut at the February 2020 meeting.
  • NZD: RBNZ Governor Orr’s comments flag optimism; Key highlights – (1) Rates will be low for a long time, policy is already very stimulatory. Low FX rate adding to stimulus. Still, the door is open for a rate cut if needed. (2) Bank is starting to see signs of a pickup in activity and is in a "nice position" to observe data. (3) Market reaction to the recent decision was not surprising.  

 

 

Asia FX: China data lackluster but unlikely to dent portfolio inflows          

  • CNY: Chinese data highlights – (1) Fixed Assets ex rural YTD comes in at 5.2% versus 5.4% expected and prior, the lowest since 1998 mainly due to surprising sluggishness in infrastructure, which declined for the first ten months. (2) Industrial Production YoY shows a 4.7% gain vs 5.4% expected and 5.8% prior. (3) Retails Sales YoY growth dips to 7.2% versus 7.8% expected and prior.  
  • CNY: Citi analysts remain positive on China bond and equity inflows due to index inclusion and likely stabilization of RMB. With more funds starting to prepare for the GBI-EM inclusion, which starts in February 2020, the team expects fixed-income market inflows to remain sticky. Bloomberg-Barclays index investors are also likely to increase their China allocation, as China’s weightage in the index now exceeds 2%, a limit of tracking error tolerance of some funds. MSCI will likely also further increase A-share weightage in its November index rebalancing, which could drive stronger Northbound flows. With RMB expected to stabilize and corporates increasing their FX conversions into RMB, the positive FX momentum in turn is likely to encourage portfolio inflows.         

 

 

This is an extract from the Daily Currency Update, dated November 15, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

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