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FX

Safe havens (JPY, CHF, Gold) & USD: Tactically bearish as positive risk momentum builds; EUR firms ahead of Thursday’s ECB meeting

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Safe havens (JPY, CHF, Gold) & USD: Tactically bearish as positive risk momentum builds; EUR firms ahead of Thursday’s ECB meeting    

  • Safe Havens (JPY, Gold): More positive headlines on US – China trade = more positive risk sentiment – South China Morning Post headlines revisit weekend news of China looking to make additional agricultural purchases. The news agency refers to this as a potential “deal sweetener.” and the comments come shortly after US Treasury's Steven Mnuchin's comments per Bloomberg that he wants "to ensure China treats US farmers fairly." In a similar optimistic tone, WSJ headlines made the rounds – “Will Trump Sell out the US on Huawei?”. This follows news that Huawei is dropping its lawsuit against the US.    
  • Safe Havens (JPY, Gold): President Trump fires National Security Adviser John Bolton, tweeting "…I disagreed strongly with many of his suggestions, as did others in the Administration, and therefore........I asked John for his resignation, which was given to me this morning”. There are two implications here – (1) What this means for Iran - Bolton is known as one of the biggest hawks in the Trump administration on Iran and his departure could open the door to a more friendly policy towards Iran; (2) What this means for China – less clear and unlike US trade representative Peter Navarro, Bolton is not the biggest hawk here. Nevertheless, he has encouraged a containment strategy on China, but more so on security than trade.     
  • EUR: Tomorrow’s ECB meeting could potentially disappoint on QE - MNI 'sources' indicate overnight that the ECB could delay QE launch to make it more data dependent. But Citi analysts look for the ECB to deliver a full package of measures, including a rate cut (10bp), resumption of QE (EUR360bn over 12 months) and a reformulation of forward guidance to make it more open-ended, more state-contingent and more directly linked to (core) inflation performance. Notwithstanding MNI sources overnight, even recent ECB speak so far however appears to downplay prospects of restarting QE. Also note that ECB easing expectations are now more than fully priced into markets (15bp of rate cuts + QE + strengthening forward guidance + cheapening TLTRO pricing) and the risk decidedly is for the ECB to underwhelm expectations.  
  • Week Ahead - USD: This week in US sees August core CPI on Thursday (Citi analysts expect a solid at 0.18%MoM and 2.3%YoY) while August retail sales on Friday may moderate following 5 months of strong readings (Citi analysts expect +0.1%MoM).           

 

Firmer floor in EUR but strong rally unlikely; UK wage growth up to pre- crisis levels; Bullish/ bearish Brexit scenarios   

  • EUR: A potentially modestly firmer EUR post ECB tomorrow as the meeting fails to deliver on the elevated market expectations. QE remains the key variable and its impact on EUR is seen as follows – (1) A EUR30bn monthly re-start of QE purchases for 12 months consisting mostly of sovereign debt purchases would be bearish for EUR and bullish for German Bunds (lower yields). (2) EUR30bn monthly re-start of QE purchases for 12 months but qualitatively different from (1) with more weight on private sector bond purchases than sovereigns - likely more effective in lifting euro zone growth and inflation expectations and provide a firmer floor for EUR and Bund yields. (3) ECB to delay QE launch (as per MNI reports overnight) to make it more data and fiscal stimulus dependent ie. time QE restart with possible release of German fiscal stimulus potentially most effective way to lift euro zone growth and inflation expectations, bullish for EUR and bearish Bunds (higher yields).  
  • GBP: Maintains gains above 1.2300 overnight as UK employment growth moderates slightly in the 3 month period to July but average weekly earnings growth comes is well above expectations at 4.0% 3M %YY in July from 3.7% in June (consensus 3.7%), converging on pre-crisis levels and  pay (ex. bonus) also relatively robust at 3.8% 3M %YY (consensus 3.7%). Alongside low unemployment, strong wage growth is likely to add to domestic inflationary pressures in UK.           
  • GBP: Brexit – potentially bullish sterling scenarios – (1) PM Johnson pivots towards a repackaged Northern Ireland (NI) only backstop; (2) Irish PM Varadkar pivots towards accepting alternative arrangements. Brexit – potentially bearish sterling scenario – PM Johnson breaks the law (through loopholes in the recently introduced legislation) by not seeking an extension from the EU should he fails to secure a Brexit deal by October 19th (at the EU summit) and looks to crash out with a “No Deal”.        

Commodity Bloc: Tactically bullish versus USD, Asia EM and safe havens (JPY, CHF & Gold)

  • AUD: NAB Business Confidence comes in slightly weaker but there is little reaction from AUD as the risk -on mood dominates with real money accounts seen buying AUD amid the broadly positive market sentiment for risk. This also suggests a degree of tactical outperformance against its peer NZD, Asia EM FX (CNH, SGD etc) and safe havens (JPY, CHF, Gold).
  • CAD: Canadian housing starts for August beat expectations at 226.6k vs consensus for 212.5k and prior 222.5k. Canadian building permits data for July also posts a strong beat at 3%MoM vs 2% expected with the prior print also revised higher. As with AUD, a degree of tactical outperformance is seen vs NZD, Asia EM FX (CNH, SGD etc) and safe havens (JPY, CHF and Gold).

China – announces removal of investor quota limits 

  • CNY: Chinese regulators announce removal of the investor quota limit, opening up their interbank market to foreign investors – CNY bullish on the margin.  At the same time, CNY continues to fix stronger than both previous fixes this week and market expectations (7.0846 vs previous 7.0851 and Citi estimate 7.1071) which signals signs of stabilization ahead of US – China trade talks in October.   

           

This is an extract from the Daily Currency Update, dated September 11, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

 

 

 

 

 

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