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Safe Havens (JPY, CHF & Gold): Appeal for safe havens fade as talk of fiscal (plus monetary) policy stimulus gains

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Safe Havens (JPY, CHF & Gold): Appeal for safe havens fade as talk of fiscal (plus monetary) policy stimulus gains  

  • White House rubbishes talk of an imminent US recession while raising speculation of possible fiscal stimulus from a payroll tax cut – (1) President Trump - “we’re doing tremendously well. Our consumers are tremendously rich. They’re loaded up with money. Walmart is through the roof. We’re not going to have a recession while also calling for the Fed to cut rates by a 100bp; (2) President Trump explores payroll tax cut - Fresh claims from the Washington Post overnight that “White House officials are exploring a payroll tax cut to prevent economic downturn“; (3) White House Economic Advisor Larry Kudlow - there’s no recession on the horizon…..So I think actually the second half of the economy is going to be very good in 2019. No I don't see a recession; (4) White House trade advisor Peter Navarro - I can tell you with certainty that we’re going to have a strong economy through 2020 and beyond…..All what needs to happen here, is for the Federal Reserve to do what it needs to do, which is begin lowering interest rates. That would make the economy return to a “bullish cycle”.              
  • Positives on the Huawei announcement (and for US – China trade talks) plus possible German fiscal stimulus – (1) US Commerce Secretary Wilbur Ross confirms the US would offer companies another 90-day exemption allowing them to continue business with Huawei. The comments give more breathing room on the US – China trade front where President Trump has already delayed implementation of the 10% tariff on some Chinese imports; (2) Talk of German fiscal stimulus – German Finance Minister Olaf Scholz  suggests on Sunday that Germany could drop its all-important “black zero” budget balance rule and muster EUR50bn of extra spending in an economic crisis. This sees EURUSD gain and Bund yields spike and comes as the German Bundesbank warns the German economy could contract yet again in Q3 that would see it fall into a technical recession. The news follows  ECB Rehn’s dovish comments last week on the ECB’s September easing package likely to be “substantial” and “impactful”.   
  • This week in the US, Fed Chair Powell speaks Friday at the Fed’s annual Jackson Hole economic symposium and is expected to sound dovish. Minutes from the July FOMC meeting may sound hawkish but will be stale as Jackson Hole overrides the Minutes. US — US-China trade tensions will also be in focus on how China retaliates ahead of the 10% tariffs to be implemented on 1 September amid the possibility of talks between Presidents Trump and Xi.  

 

Bundesbank’s warning on Germany seen to justify monetary & fiscal stimulus ; UK PM sees solution to Irish backstop     

  • German Bundesbank sees possible further German pain; Key comments – (1) Sees risk German economy could shrink again, outlook unclear, hinges on exports; (2) Sees euro-area economy growing at subdues pace in Q3; (3) Sees first signs of downturn in labor market. But EUR hardly reacts to the comments and Bund and Euribor yields spike (the latter from pricing around 41bp of ECB rate cuts by December 2020) as the Bundesbank warning is seen as a call for an aggressive ECB monetary and German fiscal stimulus. Indeed, the German finance minister follows up with comments the government could ready a EUR50bn fiscal stimulus package in the event of a German recession.        
  • Bottom Line - Specter of a combined ECB monetary easing (with a qualitatively different QE package focused more on purchasing corporate credits and equities than just sovereign debt) together with a significant German fiscal stimulus program would likely represent a powerful stimulus to lift euro zone inflation expectations and growth – potentially bullish for euro while lifting Euribor and Bund yields.  
  • Italy: Tonight’s “No-confidence” vote in Italy is likely to succeed, leaving President Mattarella with 3 options (1) a Five-Star-PD government; (2) a continuation of the Five Star-Lega coalition, possibly after a deep reshuffle; (3) snap elections in late October. Bottom Line - A compromise with enemies and/or dropping extreme positions could potentially smooth Italian country risk and could also offer a compromise on the Italian budget with Brussels that may be now less difficult than anticipated.     
  • UK PM Johnson offers his solution to the Irish backstop in a letter to European Council President Donald Tusk, saying he wants to replace the so-called Irish backstop provision in the divorce agreement with a “legally binding commitment” not to build infrastructure or carry out checks between Northern Ireland and the Republic of Ireland --  as long as the bloc promises the same. This follows a Sunday Times report that shares details about ‘Operation Yellowhammer’ – the codename for contingency planning for a “No Deal” which includes expectations of shortages in medicine and food. The PM travels to Berlin and Paris this week to discuss Brexit with German Chancellor Angela Merkel and French President Emmanuel Macron and is “confident” they’ll eventually shift and give him a deal.
  • This week sees UK PM Johnson likely to make the G7 summit a “big moment” for Brexit, announcing either a break-through or a breakdown in talks. Data wise, Citi analysts expect Germany August manufacturing PMI at 42.9 and euro zone manufacturing PMI at 46.0. The focus will also be on the ECB Minutes for further clues about easing measures to be delivered at the September 12th meeting.              

           

Singapore - Is MAS edging closer towards easing policy?         

  • Despite better than expected Singapore July export data (NODX), early signs of a broadening slowdown into consumption may be emerging, even if pockets of resilience remain. Singapore’s central bank (MAS) notes the increasing importance of consumption in transmitting economic shocks. This may intensify disinflationary effects and given its single price stability mandate, should MAS deem this sufficient to lower the 2020 core inflation forecast closer to or below 1%, odds could tilt in favor of a 50pip easing via slope reduction in October. Australian  

 

This is an extract from the Daily Currency Update, dated August 20, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

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