Sustained de-escalation in trade tensions?
- US Treasury Secretary Mnuchin now sees the US–China 90-day truce announced over the weekend culminating in a “real agreement” while Trump economic advisor Kudlow believes “China’s commitments will start immediately with US companies (doing business in China) set to get majority ownership of companies for the first time”.
- Earlier, President Trump tweets that China has agreed to “reduce and remove” tariffs on imported American-made cars (currently 40%) and that Robert Lighthizer will lead trade talks from the US side instead of the more China hawkish Peter Navarro.
- US – China 90-day ceasefire announced over the weekend sees skepticism all around. But indications are that this may not only support risk appetite and trade- and China-sensitive currencies (including AUD, NZD) in the short term, but that the thaw may result in more sustained progress towards a comprehensive agreement over the next 90 days (a more medium-term USD negative).
EUR & GBP: Italy finally budging on budget but hurdles still seen on the path towards a more sustainable rally; UK bracing for Tuesday debates
- Bloomberg reports that Italy PM Conte is preparing for a 2019 budget deficit of 1.9 – 2.0% (Messaggero) and that he, not Finance Minister Tria, will negotiate on the budget with the EU. The reports also indicate that both deputy PMs Di Maio and Salvini (who have so far held a hawkish “no compromise line) are ready to accept the new target. Salvini later comes out to say that he’s not working on a plan below 2.0% (this seems consistent with the Conte comments).
- Reports of Italian PM Conte’s compromise on the Italian budget are yet to be confirmed (and hence the hesitation in euro to rebound more solidly) but if true, would remove one of 3 factors currently undermining euro sentiment (the others being weaker euro zone data and US weighing levying tariffs on European car imports). On European car imports into the US, Citi’s baseline is the US may announce auto tariffs with temporary exemptions, but risks are that these might not last for long.
- GBP is the worst performer overnight amid heightened Brexit uncertainty with several stories doing the rounds about PM May being forced to release the full legal advice from the Attorney General on the Brexit Withdrawal Bill. PM May’s reluctance to do so has incurred a possible contempt of parliament charge that will now be debated first before the 5 day debate on the Brexit deal itself.
- This is bad news for PM May because if the contempt motion is passed, MPs opposing her Brexit deal may well be tempted to pass a no-confidence motion in her sooner rather than later. And the news does not get any better with PM May's chief Brexit Adviser Robbins reportedly warning her that the customs backstop is a "bad outcome" for UK which will see regulatory checks in the Irish Sea and put security co-operation at risk. He further indicates that there is no legal "guarantee" that Britain will be able to break off from the backstop, potentially leaving the UK trapped in a Customs Union with the EU “that would likely prevent the UK from entering into trade deals with countries such as the US”.
Commodity bloc: Slightly lower but still robust Q3 Aussie GDP likely; OPEC likely to announce oil output cuts
- In data released yesterday, Aussie housing data comes in line with expectations while company operating profits, wages/salaries and inventory data aren’t as strong, leading Citi analysts to downgrade their Q3 GDP forecast slightly to 0.7% from 0.8%. This would still keep yearly GDP growth unchanged at 3.4% and see the RBA retaining its unchanged rates stance at today’s meeting.
- Some positive news on oil over the weekend with Russia's President Putin and Saudi Arabia's Crown Prince Mohamed Bin Salman indicating that they will continue to collaborate efforts to stabilize oil prices. OPEC holds a key meeting on Thursday/Friday this week to decide whether more output cuts are necessary. Canada also indicates that it will cut output by 325,000 barrels a day, an unprecedented step to ease a crisis in the Canadian energy industry.
Asia EM: China Caixin PMI highest since August; Citi analysts see possible CNY strength to year-end
- China's Caixin Manufacturing PMI print for November comes in marginally higher than expected at 50.2 (vs. 50.1 consensus) with investors likely to take some heart from the number being the series' highest since August and with new orders at their highest since July. And with US-China now calling a 90-day truce, Citi analysts believe CNH could strengthen to year-end should capital market inflows pick up due to the easing in tensions and PBoC does not let RMB weaken above 7.00 due to political goodwill and objective to support domestic capital market confidence.
This is an extract from the Daily Currency Update, dated 4th December 2018. Please approach a Citigold Relationship Manager if you would like more information.