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FX

Sterling Hit by More Brexit Uncertainty

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Sterling Hit by More Brexit Uncertainty              

  • Sterling continues to break to new lows on the back of the latest Brexit article from Business Insider saying some EU member states could abandon one of the European Commission's negotiating red lines in return for more concessions from their British counterparts. The alleged concessions are referenced in an earlier Times report that would allow UK to retain single market access for goods membership in return for the UK replicating all environmental, social, and customs rules of the EU in addition to those set out in her so-called Chequers proposals. Market sentiment towards this so-called Jersey deal appears to be negative as they see the deal unlikely to survive a UK Parliament vote and that means the EU and UK are still no closer to a Brexit agreement.

 

 

USD: Gains from geopolitical tensions overnight, awaiting US July CPI

  • USD rallies broadly overnight on escalating geopolitical tensions as China responds to Trump’s tariffs with additional tariffs of its own (USD25bn worth of US exports) and the US announces new sanctions on Russia. Markets await tonight’s US July CPI release with Citi analysts expecting core CPI to rise 0.21% MoM at the fastest monthly pace since January, reflecting a bounce-back from transitory factors.

 

 

Commodity Bloc: A decided dovish RBNZ, AUD housing finance holding up, NAFTA back on the table for CAD

  • Key highlights of the RBNZ statement – (1) Lowers forecasts for NZ growth (2.5% through this year vs. 3.2% previously) with the new forecasts now showing a small negative output gap until later next year whereas previously it estimated a positive output gap of around 0.5% of GDP; (2) Pushes back forecasts for the first rate hike to Q3 2020 (versus Q3 2019 prior) while maintaining the next move could be up or down; (3) Scenarios also more dovish, with 100bps of cuts in the 'downside' scenario (versus 50bps prior) should GDP growth stay below 3.0% over 2019; (4) Inflation expected to reach 2% in Q1 2021 (versus Q4 2020 prior) with risks "balanced“; (5) Growth risks are to the downside due to international trade tensions and a possible tightening in global financial conditions; (6) On NZD, sees it near fair value and is very “pleased” with current levels with NZD TWI projected to be around the current 72 though with risks to the downside.

 

  • Housing finance is holding up despite squeeze on investors - Total value of housing finance (owner occupiers and investors) falls 1.6% in June and continues to highlight that the main impact of APRA’s prudential tightening measures has been to shift the composition of lending away from investors. The fall nevertheless is orderly and consistent with the RBA’s expectations.

 

  • NAFTA back on the table - News overnight that Canada could be re-joining trade talks with US as early as next week, which offsets the negative Saudi news from earlier in the week when Saudi has decided to cut off diplomatic relations with Canada following the latter’s criticism of its human rights.

 

 

Asia EM: Chinese data stable for now despite trade dispute with the US

  • China trade data in USD terms sees exports up 12.2% versus 10% expected and imports up 27.3% YoY versus 16.5% expected, leaving a trade surplus with the US at USD28.089bn versus 28.97bn last month. Overall, the data shows exports and imports remain solid for now and that trade with US has not been impacted much so far despite the tariff war. Chinese inflation also surprises to the upside with July one-tenth higher than expected at 2.1% YoY.

 

  • The better than expected trade data does not mean the punitive tariff won’t affect exports and imports, but that it may take some time to exert its influence. Citi analysts estimate that the two rounds of US tariffs would affect China’s economy negatively by ~104bps and affect 4.4mn jobs, and expect both exports and imports growth will decelerate for the rest of this year.

 

 

This is an extract from the Daily Currency Update, dated 10th August 2018. Please approach a Citigold Relationship Manager if you would like more information.

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Market Specific Disclosures

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