Tactically bearish Safe Havens despite Saudi oilfield attack; US – China trade outcome remains fundamental driver of USD sentiment

Tactically bearish Safe Havens despite Saudi oilfield attack; US – China trade outcome remains fundamental driver of USD sentiment              

• Safe Havens (JPY, CHF & Gold): Attack on Saudi oilfields probably not enough to damage risk sentiment unless US conducts military strikes on Iran - Drone attacks on Saudi oilfields over the weekend amount to ~50% cut in Saudi’s total output and ~5% of world supplies. Impact on risk sentiment though is brief with USDJPY initially gapping down and to 107.45 in early trading Monday before reversing to trade above 108.00 while Gold bounces above 1500 on Monday’s opening only to pull back to 1497 this morning. US accuses Iran of being behind the attacks and tension remain high with President Trump tweeting “[We] are locked and loaded depending on verification….”. However, this does not necessarily mean military action. Indeed, since those comments, President Trump has indicated he would “like to avoid” military escalation, saying “I know they want to make a deal… At some point it will work out.” Trump also adds he has pledged to help but not protect Saudi. Furthermore, White House sources are still not ruling out a Trump- Rouhani meeting.          

• Safe Havens (JPY, CHF & Gold): Main focus still remains on US trade deals where optimism still holds – (1)   US – Japan have agreed to a trade deal with the US agreeing not to hike tariffs on Japanese autos, according to the Tokyo Shimbun newspaper Monday. (2) US is poised to impose tariffs on USD11bn of EU exports over the bloc's subsidies to Airbus SE. However, this is a long-running commercial dispute over aircraft manufacturers and is separate to a potential US – EU trade deal later this year where the just concluded US – Japan trade agreement may serve as a useful template to waive tariffs on European cars – a key issue for the euro zone economic outlook. (3) Further developments on US – China trade – with USTR’s Lighthizer overnight indicating US and Chinese deputies will meet Friday and that there has been movement towards Chinese purchases of US agricultural products.           

• USD Outlook: USD’s bid tone overnight comes from 2 sources – (1) the USD funding market with the FX swap market showing a bid for USD, following US Q3 corporate tax day and settlements. (2) Building expectations a “hawkish” Fed rate cut this week – Citi analysts expect the updated Fed dot plots to show a median dot indicating no further rate cuts this year, in line with their own base case for no further cuts in 2019 or 2020. Citi analysts also expect Chair Powell to present an upbeat view of the consumer-driven US economy while emphasizing that the Fed remains committed to “act as appropriate to sustain the expansion.”     

A firmer floor in euro but a sustained rally unlikely for now; Sterling sentiment firmer ahead of EU October Summit        

• EUR: An overnight pullback in EURUSD but still within a broader range – EURUSD slips back to 1.100 overnight amid a broader USD bid. ECB chief economist Phillip Lane’s speech overnight is  largely dovish but expected and timed to counter the hawks saying, “Incoming information is signaling a more extended slowdown in euro area growth dynamics than previously expected……it is clear that a highly accommodative stance of monetary policy will be necessary for a prolonged period of time”.   

• EUR: There is also trade news with Politico reporting WTO has allowed the US to impose modest tariffs on imports from the EU in retaliation for illegal subsidies to Airbus (EUR5-10bn). However, this is a dispute from the past and has little bearing on what lies ahead with respect to the key issue of US tariff imposition on European cars. A useful template to follow here is the recently concluded US – Japan trade agreement (refer Safe Haven strategy on PP1) where there will be no new US tariffs on Japanese cars. A similar outcome for European cars would likely be broadly EUR supportive.    

• GBP: Slips -0.6% towards 1.2425 overnight following broader price action (a better bid USD) though the Juncker-Johnson lunch meeting does appear to end on an optimistic note with outgoing EU head Juncker describing the talks as “good”. With “No-Deal” Brexit probabilities having fallen over the past week, GBP positioning now appears to be turning long, driven by buying from real money investors. Citi analysts’ base case - firmer GBP outlook in 2 of 3 alternatives – Brexit deal/ UK Labor victory in general elections likely sterling positive, ‘No Deal” Brexit likely sterling negative.          

Commodity Bloc: Higher oil prices a boon for CAD; Week Ahead – Australian jobs, NZ Q2 GDP, Canadian CPI and retail sales  

• CAD: The takeaway from the weekend’s drone attacks is a highly vulnerable Saudi infrastructure to attack and oil should be a good $10 a barrel higher (Citi analysts). Higher oil prices together with the BoC on hold this year suggests a degree of CAD tactical outperformance  against USD and its peer NZD, Asia EM FX (CNH, SGD etc) and safe havens (JPY, CHF and Gold).

• Commodity Bloc: Australian jobs, August: Employment: 22k, Last: 41.1k; Unemployment Rate: 5.2%, Last: 5.2% - Citi analysts forecast a 22k August gain that would keep the unemployment rate at 5.2%.  NZ Q2 GDP Forecast: 0.4%, Last: 0.6% - Q2 GDP is likely to print at a below average 0.4% to slow yearly growth from 2.5% to 2.0%. Headline Canadian CPI should retrace to 1.8%YoY in August, although core-CPI measures will be key. Retail sales in July should rise 0.7% on bounce-back in autos.                  

Asia EM: China – Activity weakens further; Citi lowers GDP forecast     

• CNY: China’s August industrial production rises 4.4%YoY vs consensus expectations for a gain of 5.2%, while retail sales are up 7.5%versus 7.9% expected. Investment growth shows a similar miss, with fixed assets ex rural coming in at 5.5%, 2 percentage points shy of consensus forecasts. Citi analysts consequently lower their growth forecast for China to 6.2%YoY for 2019 and 5.8%YoY for 2020 amid data weakness and growing headwinds.    

This is an extract from the Daily Currency Update, dated September 17, 2019. Please approach a Citigold Relationship Manager if you would like more information.