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A solid risk rally on vaccine hopes, re-opening news and higher oil prices leaves USD sharply weaker

-->A solid risk rally on vaccine hopes, re-opening news and higher oil prices leaves USD sharply weaker                              
  • USD: DXY falls ~0.75% overnight, marking the largest daily decline since late March on vaccine hopes – a US drug manufacturer reports individuals treated with its small early vaccine trial develop the same concentration of antibodies found in COVID-19 recovery patients and with limited side effects. Phase 2 of the trial will cover 600 patients “shortly,” while Phase 3 is due in July. This is followed by President Trump who promises "big announcements" soon on vaccine and therapeutics. On fiscal efforts, says he is considering an “Explore America” tax credit.                        
  • USD: Reopening news also adds to the risk rally overnight - 75% of California is reopened according to the state governor, as well as a large US technology firm reporting plans to reopen more stores. This combination seems to outweigh cautious comments from Fed Chair Powell on Sunday warning the US recovery could take until 2021, but that most layoffs so far could be temporary. The wild card still appears to be the risk of second waves. On this, Chair Powell comments “assuming there is not a second wave of the coronavirus, I think you will see the economy recover steadily through the second half of this year.”    
  • USD: WTI shines - the rally in oil prices overnight sees the WTI June contract back above $30 for the first time in almost two months – a stunning turnaround from negative prices in the front-end contract almost a month ago. This is very much a supply driven story - US drilling rigs have fallen for a ninth week while Cushing inventories fell last week and OPEC+ continues to cut production deeper than required.


Euro developments on a joint fiscal response add to the risk rally                    

  • EUR: Gains a big figure overnight on a coordinated response from Germany and France for euro bonds - a joint French-German initiative for a EUR540bn EU recovery fund reinforces investor expectation that pro-European forces will avert a major escalation in breakup risks. This forms part of the EC proposal of a Recovery fund with more details due on 27 May. The proposal includes three elements that are behind the market’s positive reaction (1) reference to ‘grants’ not loans in the distribution of funds as well as ‘joint funding’; (2) symbolism of a joint French-German proposal; and (3) low investor expectations into the announcement as earlier hopes were geared towards a possible announcement by September. Also note news that Germany is looking to add another €100bn supplementary budget for 2020.          


GBP pressured by negative rate headlines but quickly regains its footing

  • GBP: BoE chief economist Haldane wants to study easing policy options including negative rates - Haldane indicates that the Bank is reviewing a number of policies including negative interest rates and expanding the scope of the bank’s asset-purchase plan to include riskier securities “with somewhat greater immediacy.” This is contrary to pushback by Governor Bailey last week against negative rates. Note however that Haldane stresses the BoE isn’t poised to impose any of those polices imminently.
  • GBP: BoE member Tenreyro also declares that “[negative rates[ have had a positive effect in the sense of having a fairly powerful transmission to real activity…There are some considerations that are more specific to the UK and will need to be worked out including  effect on some financial institutions, implementation, communication and so on… For now, everything is on the table for us.”  The comments leads UK short rates to price sub-zero rates from December 2020 onwards (8bp of cut priced in by February 2021).
  • GBP: Bottom Line – neither the comments from BoE chief economist Lane nor board member Tenreyro suggest a move to negative rates is imminent in the UK. However, the concept needs to be studied as part of a more thorough analysis on the BoE’s full toolkit.            


Week Ahead: FOMC & ECB Minutes and EZ PMIs the key data this week                      

  • USD: Continuing jobless claims will likely send a strong signal regarding the health of the labor market. FOMC minutes may give clues to eventual forward guidance.
  • EUR & GBP: German ZEW Expectations for May (Citi: 32.0 from 28.2 prior); UK CPI Inflation for April Citi: 0.8% YY from 1.5% YY; German Manufacturing PMI, May Flash Citi: 38.0 from 34.8; Services PMI Citi: 35.0 from 16.2 – PMIs seen rising as lockdown eases, but remain well in contractionary territory; Euro Area: Manufacturing PMIs May Flash Citi: 40.0 from 33.6; Services PMI Citi: 25.0 from 12.0; Composite PMI Citi: 24.0 from 13.6 – Modest gain for manufacturing PMI seen, getting closer to 50-mark with bigger uptick for Services PMI from the very low reading prior and the first increase in three months for composite PMI; UK Manufacturing PMI, May Flash Citi: 44.5 from 32.6; Services PMI Citi:41.1 from 13.4; Composite PMI Citi: 41.8 from 13.8 – Rebound from unprecedented lows for PMIs but still below 50-mark; UK Retail Sales, April Citi: -12.1% MM, -18.4% YY from -5.1% MM, -5.8% YY; ECB will also publish minutes of the April meetings and BoE Governor Bailey will testify before the UK Parliament.
  • COMMODITY Bloc: NZD: NZ Q1 Retail Sales - Citi Q1 QoQ forecast; -9.8%, Previous; 0.7% - High-frequency data such as electronic card spending data suggests a precipitous fall in retail trade volumes in Q1; CAD: Canadian retail sales for March should fall by 10%, but sales excluding autos could show a more-muted decline due to stockpiling-related sales. Meanwhile, headline CPI should fall on declining energy and travel and tourism-related services prices. 
  • ASIA EM: Singapore Non-oil Domestic Exports (%MoM sa) April Citi -18.3, Consensus -19.8, Prior 12.8; (%YoY) Citi-6.4, Consensus -5.0, Prior 17.6; Singapore GDP (%QoQ SAAR) 1Q F Citi -9.0, Prior -10.6; GDP (%YoY): Citi -1.8, Prior- -2.2 – Citi analysts expect Singapore’s 1Q GDP to be revised up to -1.9% YoY, -9% QoQ SAAR though the team expects MTI could revise its 2020 GDP forecast downwards, possibly to -9% to -6% from -4% to -1% currently. CNY: China - 1-Year Loan Prime Rate (%) - Citi 3.85, Consensus 3.85, Prior 3.85 – Citi analysts expect PBoC’s 1-year Loan Prime Rate (LPR) to stay flat at 3.85% in May. PBoC just cut MLF rate on April 15, and the team does not expect another cut until June. 
  • Asia EM: China’s NPC to sign off fiscal measures - China’s two sessions will kick off this week, with the CPPCC opening on May 21, and the NPC opening on May 22. China plans to increase its fiscal deficit as a percentage of GDP, issue special sovereign debt and allow local governments to sell more infrastructure bonds. Citi analysts expect fiscal stimulus is likely to be in line with expectations to the tune of 5-5.5% of GDP (including on and off balance sheet measures). Local special bond issuance is expected to amount to CNY3.5-4tn and central government special bond issuance at CNY2tn.           


This is is an extract from the Daily Currency Update, dated May 19, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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