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Tactically bearish safe havens and USD as new momentum builds for US – China talks; Germany fiscal chatter remerges

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Tactically bearish safe havens and USD as new momentum builds for US – China talks; Germany fiscal chatter remerges  

  • Safe Havens (JPY, Gold): Trade headlines more positive as US Treasury Secretary Mnuchin discusses China and trade deal with Japan; Says – (1) US and China have "made a lot of progress" in talks and that the US objective is "to get a good deal on China.” Mnuchin also anticipates PBoC Governor Yi Gang coming to the US for further discussions over “currency manipulation”. As a reminder, the USTR has already labelled China as a currency manipulator and markets await the department's semi-annual Exchange Rate Practices report due mid-October. (2) A trade deal with Japan will be finished very soon. Citi analysts expect a preliminary trade agreement to be discussed during an extraordinary session of the National Diet, between September and December. (3) A Politico article highlights the Chinese have reportedly offered to make farm purchases demanded by President Trump. However, this offer is reportedly contingent on a potential delay to the October 1 tariff increases. (4) Hu Xijin, editor of China’s state-run Global Times newspaper, strikes an upbeat tone overnight, saying, “Personally I think the US, worn out by the trade war, may no longer hope for crushing China’s will. There’s more possibility of a breakthrough between the two sides.”  
  • EUR: Germany: Fiscal chatter delivered in two rounds – (1) A Reuters report claims Germany is mulling a shadow budget to circumvent strict debt rules, saying “Government officials are flirting with the idea of setting up independent public entities that would seize the historic opportunity of zero borrowing costs and take on new debt to increase investment in infrastructure and climate protection.” (2) Bloomberg sources cite a letter from the German deputy finance minister saying  “should there be a need for adjustment because of overall economic developments or external factors, it will be decided in the context of the budget planning and taking the coalition agreement into account.”  
  • USD Outlook and Week Ahead: The path towards sustained USD weakness lies with a resolution of the US – China trade dispute, not so much with Fed rate cuts that markets have already aggressively discounted (a further 5 rate cuts leading to a terminal rate of 0.75 – 1.00%). Should a trade deal be concluded in October, this would likely result in a reversal in current CNY/ CNH weakness that is expected to flow on to strength in other risk currencies within G10 and EM (commodity bloc, Asia EM and even EUR) with safe havens taking a hit along with USD. This week in US sees August core CPI (Citi analysts expect a solid at 0.18%MoM and 2.3%YoY) while August retail sales may moderate following 5 months of strong readings (Citi analysts expect +0.1%MoM).         

 

Euro firms ahead of Thursday’s ECB meeting; Sterling outperforms on Brexit buzz  

  • EUR: EURUSD rallies to nearly 1.1050 overnight reflecting the fiscal chatter (refer to the EUR piece on page 1) and German July trade data that points to positive net exports in Q2 (up 0.7% MM in July versus consensus for -0.5), following a nearly flat reading in June. By contrast, imports drop 1.5% MM (Consensus -0.2, Citi -0.3), following a 0.7% MM increase. Germany is heavily reliant on exports and the July data points to a strong positive contribution to GDP in 3Q.
  • EUR Outlook: A firmer floor but a strong rally post ECB meeting unlikely - Citi analysts and market consensus look for the ECB at Thursday’s meeting to deliver a small rate cut (10bp), resumption of QE (EUR360bn over 12 months) and reformulation of forward guidance to more open-ended, more state-contingent and more directly linked to (core) CPI performance. However, expectations for ECB stimulus are now more than fully discounted into market pricing and if anything, ECB speak so far appears to downplay prospects of restarting QE. An ECB stimulus package that underwhelms could provide a firmer floor for EUR but to significantly strengthen EUR would require – (1) resolution to the US – China trade dispute accompanied by a reversal in CNY/CNH weakness; (2) a credible ECB stimulus package complemented by the promise of fiscal stimulus from core Europe – odds of both (1) and (2) have gone up fairly markedly in the past few days.         
  • GBP: Brexit developments overnight see a firmer sterling – (1) UK parliament rejects PM Johnson’s call for a pre-Brexit snap election on October 15th; (2) Speaker of the UK House of Commons Bercow announces timeline for leaving; (3) UK parliament is suspended at the end of Monday’s business; (4) PM Johnson says he will not ask for another delay to Brexit despite parliament legislation (that is now law) that compels him to seek an extension if he is unable to finalize a Brexit deal by October 18th; (5) But PM Johnson softens his tone in a press conference earlier with Irish PM Varadkar, saying he is determined to find a Brexit deal by October 18 (ahead of EU Council Summit) and there would be a “breakthrough”. (6) UK MPs vote in favor of Dominic Grieve’s motion to force UK government to publish its preparations for a no-deal Brexit, as well as correspondence related to decision to suspend Parliament.      

 

 

China - exports contract in August on rising trade tensions

  • CNY: China’s export growth turns negative in August and in USD terms reverses from 3.3%YoY in July to -1 %YoY in August, worse than consensus for +2.2%YoY. Decline in imports remains at -5.6%YoY in August (vs. prev.: -5.3%YoY, mkt: -6.4%YoY) and the trade surplus narrows from US$44.6bn previously to US$34.8bn. In particular, bilateral trade growth with US decelerates further with export growth declining sharply by another 9.5ppt to -16%YoY and decline in imports intensifies by a further 3.2ppt to -22.3%YoY, leaving China’s trade surplus with the US broadly stable at US$27bn. 
  • CNY: Notwithstanding China’s trade data above, US – China trade tensions appear to be cooling somewhat (refer Safe Haven strategy on PP1) in the short-term and market pricing of these risks is starting to moderate. USDCNH is drifting lower as a result, alongside more evidence that Chinese authorities have been aiming to stabilize the RMB. This week sees China’s FAI is expected to show growth at 5.6%YY YTD, retail sales at 7.3%YY, and industrial production at 5.2%YY.

           

This is an extract from the Daily Currency Update, dated September 10, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

 

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Ultra-high net worth investors are:

(a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 25 million or more

(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 25 million; or

(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).

GLOBAL CONSUMER BANK (ASIA PACIFIC AND EMEA):

“Citi analysts” refer to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”), Citi Global Wealth Investments (“CGWI”) and voting members of the Citi Global Investment Committee.
Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document.

The information in this document has been obtained from reports issued by CGMI and CGWI. Such information is based on sources CGMI and CGWI believe to be reliable. CGMI and CGWI, however, do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute CGMI and CGWI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended
as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware
of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Investment products are not available to US persons. Investors should be aware
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Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For more information, please refer to https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures.

MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs,
and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong
and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

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the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom
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Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making
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themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from Its use.

CSL does not provide discretionary portfolio management services.

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