Safe havens JPY, CHF & Gold set to reverse moderately as US – China truce provides a near term respite to risk sentiment

-->Safe havens JPY, CHF & Gold set to reverse moderately as US – China truce provides a near term respite to risk sentiment 

• •Safe haven JPY, CHF & Gold: The Trump – Xi meet at the G20 exceeds market expectations but only slightly as the US agrees to delay further tariffs on China while the two sides agree to re-start trade talks.  Key highlights -  (1) Trade negotiations to re-start with Trump labelling his talks with Xi as “excellent’ and ‘right back on track”; (2) US to lift some restrictions on Huawei while in return, China is to buy more agricultural goods from the US. Decisions on Huawei will be "saved until the very end" in the trade talks; (3) But no comment on whether China has made any new commitments on market access or intellectual property – key sticking points that constitute the remaining 10% of the trade deal left unresolved. There is also, no timeline on a possible deal.  

• Bottom Line – There is likely enough progress at the G20 over the weekend to see a respite in risk sentiment in coming days. Indeed, investors appear to have already anticipated the G20 outcome with our CitiFX Flows team having seen long liquidation of safe haven currencies such as JPY by leveraged names late last week and hedge funds buying risk currencies such as AUD and NZD. Expect this trend to continue for the next few days though any risk rally is unlikely to sustain until more tangible results are seen on the trade front.   

US inflation firms but manufacturing activity weakens – this makes a July Fed rate cut a more difficult call            

• US data highlights on Friday include – (1) Solid US spending, inflation with personal spending advancing 0.4%MoM in May, personal income up a stronger-than-expected 0.5%MoM and core PCE inflation up a solid 0.19%MoM and 1.6%YoY. Data overall confirms the underlying strength in US consumption; (2) June Chicago PMI contracts to 49.7 vs consensus for 53.5; (3) final estimates for June University of Michigan sentiment are revised higher with headline up at 98.2 vs 97.9 prior and inflation expectations revised up to 2.7% for 1Yr and 2.3% for 5-10Yrs.  

• In the US this week, focus will shift away from a review on US tariffs on USD300bn of Chinese imports (that have now been postponed) to US data with June ISM manufacturing (Citi at 52.0), ISM non-manufacturing (Citi at 57.0) and June payrolls (Citi expects 194k jobs, AHE to rise 0.3%MM, and unemployment rate at 3.6%). Fed speakers include Williams, Mester, and Clarida.       

Shift in focus to domestic factors potentially EUR supportive        

• EURUSD ends Friday off its highs at 1.1390 to close the NY session at 1.1370. But as the focus however now shifts back to domestic drivers, this could be moderately supportive of EUR. These include  - (1) Nomination for the ECB President post Draghi who’s term ends in October – numerous articles late last week suggest hawkish German Bundesbank President Weidmann “has forged ahead in the race to lead the ECB…’. This would be a hawkish result for EUR though press reports Sunday suggest the decision may be postponed to September. (2) Euro area June flash HICP comes in stable at 1.2% YY (still a 13 month low) but core HICP surprises to the upside, exceeding Citi and the consensus 1.0% estimate to rise 1.2% YY. (3) Italy - according to la Repubblica, Italian PM Giuseppe Conte may be nearing an agreement to push back a EU decision on an excessive deficit procedure to September or October. This looks to have been confirmed by Conte and should bring short term relief to Italian assets (and EUR).  

• This week in Europe, Citi analysts expect UK PMI at 48.5, and euro zone retail sales at 0.3%MM. The focus however will be on deliberations regarding the top jobs for the EU (Commission presidency, European parliament president and ECB president – horse trading between Germany and France that sees Dutch Timmermans as favorite for the Council Presidency and German Manfred tipped to become President of the European Parliament while the ECB presidency role is a contest between Bank of France Governor (neutral) Villeroy and Bundesbank President (and a hawk) Weidmann). 

Commodity Bloc: Canada - activity heating up for the summer

• Strong BoC lending survey data and April GDP by Industry in Canada Friday supports a rebound in Canadian activity in Q2 that has already seen a strengthening CAD by about 1% last week versus USD. Key highlights – (1) Q2 Boc Business Outlook Survey indicator gains modestly to 0.2 in Q2 while the balance of future sales-growth expectations rises significantly to 23% from 6% in Q1, supporting expectations for stronger Q2 real GDP growth. (2) April GDP by industry rises 0.3%MoM in April and to 1.5%YoY, a solid increase in output following a very-strong March and is another sign that activity continues to pick back up. Citi analysts continue to expect rate cuts from the BoC are unlikely this year.   

• This week in Canada, job gains could moderate in June but wages should continue to rise over the coming months. In Australia, the pivotal RBA meeting is on Tuesday where consensus expectations are for a 25bp rate cut to bring the cash rate to 1.00%.        

Asia EM: A modest boost seen to RMB post G20     

• RMB strengthens to 6.8683 on Friday from Thursday's close of 6.8768 and ahead of the G20 meeting over the weekend. It is likely to receive a further short-term boost following the positive meeting between Chinese and U.S. leaders, pulling away from 7.00, but there is no sharp appreciation seen, given a weak Chinese economy which might require further cuts in banks' reserve requirement ratios and even interest rates. This accords with the Citi analyst base case of a modest retracement  lower in USCNH towards 6.83 post G20.

• This is an extract from the Daily Currency Update, dated July 1, 2019. Please approach a Citigold Relationship Manager if you would like more information.