US, China Reach 90-day Ceasefire on Trade Dispute   

US, China reach 90-day ceasefire on tariffs in trade dispute              

• US and China reach a 90-day ceasefire in their trade dispute at the G20 meeting over the weekend. The breakthrough comes in the much anticipated dinner meeting between President Trump and Chinese leader Xi Jinping. The outcome, albeit a temporary truce, is likely to generate positive momentum in risk assets and reverse some of Friday’s USD gains especially against Asia EM and commodity FX.

• Expectations for a full-blown trade agreement at the G20 would have been too ambitious a goal and under the agreement over the weekend, President Trump agrees to hold off for a period of 90 days, plans to raise tariffs on $200bn of Chinese imports from 10 to 25% on January 1 while China agrees to buy a “not yet agreed upon, but substantial amount of agricultural, energy, industrial” and other products to reduce America’s trade deficit with China.

• The de-escalation in US – China trade tensions (at least until Q1’2019 end) could potentially reverse USD’s (and US Treasuries) sharp gains made on Friday, based partly on US – China pessimism but also linked to month-end flows. However, the announcement also means that US – China trade tensions will continue to be a central theme for FX markets in Q1’2019.

Oil prices dip ahead of the key OPEC summit on December 6

• Oil prices also bear watching this week ahead of the December 6 OPEC meeting. Friday’s 3% fall in WTI to sub-$50 comes as the Russian Energy Minister signals his country's oil output will likely hold steady until the end of the year. Markets though go into the OPEC meeting expecting some sort of supply production cut. Note that Citi analysts also expect an agreement to cut 1 million barrels per day that would likely see a rebound in oil prices and provide further support for the commodity currencies (especially CAD).

EUR & GBP: Euro area inflation shows little sign of lifting (so far); a likely turbulent path to a UK parliamentary vote on Brexit on December 11                                      

• In what continues to be a string of disappointing data releases for the euro zone, headline CPI comes in line with expectations at 2.0% while core is slightly softer at 1.0%YoY vs 1.1% forecast. This confirms that the inflationary picture in the euro zone remains modest, and below ECB expectations (at least for now). But with markets already poised to be dovish (now pricing only 7.5bp of ECB tightening for 2019), this may put a firmer floor under EUR against USD.  

• The coming week in the UK sees the start of deliberations on PM May’s Brexit Withdrawal bill by MPs ahead of the December 11th UK parliamentary “meaningful vote” – there will be five days of political debate until a vote is finally cast on PM May’s deal. The time line – (1) December 4 - Start of debates on the "Meaningful Vote" in the Commons. There will be five days of eight hour debates, each led by a different cabinet minister, who will defend his/her brief. (2) December 8-9 - Break for the weekend. (3) December 10 - Last day (of the five debate days). (4) December 11 - Vote.

Commodity bloc: Weaker CAD GDP unlikely to deter BoC from rate hikes; Week Ahead - Australia Q3 GDP, RBA Preview; Dec. 6 OPEC meeting                                                        

• Canadian GDP in September unexpectedly declines -0.1%MoM vs +0.1% forecast with accompanying details (final estimate unchanged at 2%) also weaker. Household consumption slows to its weakest since Q1 2016 and business investment (down 6.5%) also declines despite the strong Q3 business outlook survey.  That said, Citi analysts point to the 2.0% increase in real GDP in Q3 as showing a solid pace of growth and note that the BoC has emphasized that the economy is now better positioned to handle falling oil prices and is not expecting a pick-up in investment in energy-related sectors.

• Likely supporting CAD this week is the formal signing of the USMCA by the US, Canada and Mexico at the G20 over the weekend. The agreement will require US Congress approval but Citi’s base case is that the deal will sale through in Mexico and Canada, and while there is more uncertainty, US Congress will ultimately approve the deal as well. In Australia this week, Q3 GDP data should show growth of 0.8%, slower than the average quarterly H1 growth rate of 1% but nonetheless solid with annual GDP growth likely to remain at 3½%. The RBA meeting on Tuesday is likely a non-event. For Canada, this Thursday’s OPEC meeting will be in focus – Citi analysts expect an agreement to cut 1 million barrels per day.

Asia EM: China misses manufacturing PMI

• China's November manufacturing and non-manufacturing PMI both make new lows, suggesting the PBOC will probably have to maintain a significant stimulus policy regardless of the Trump/Xi outcome over the weekend. Manufacturing is the more important of the two prints and is now veering dangerously close to contraction territory, coming in at 50.0 (vs 50.2 consensus and prior 50.2 prior) while non-manufacturing PMI also misses at 53.4 (vs. 53.8 consensus and 53.9 prior). Citi Economics are also now more cautious on China’s growth prospects.

This is an extract from the Daily Currency Update, dated 3rd December 2018. Please approach a Citigold Relationship Manager if you would like more information.