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US – China trade talks hit turbulence (again) – USD gains across the board ex JPY

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US – China trade talks hit turbulence (again) – USD gains across the board ex JPY            

 

  • Safe havens (JPY & Gold) & USD: Broad based USD gains Friday ex JPY as US trade officials remain coy on China while the University of Michigan consumer confidence index maintains strength. Key highlights (1) US trade hawk Navarro says no to tariff rollback in an interview with the NPR Morning Edition, saying "There's tariffs coming in December - December 15. We would be willing, I think, again it's up to the president, to postpone the tariffs... but not roll back any existing tariffs. That's the fine distinction here….”. (2) US President Trump backs Navarro, saying won’t fully rollback China tariffs and that he plans to sign any trade deal with China in the US. (3) University of Michigan consumer sentiment index increases slightly to 95.7, driven by a decline in expectations.  One in four respondents mention tariffs. This is more important than the decline in current conditions, while the 5-10y inflation expectations index shows an increase to 2.4%.  

 

  • USD: Still facing headwinds due to – (1) A likely de-escalation in US – China trade tensions (notwithstanding Friday’s setback) is likely to see firmer Asia EMFX that potentially translates to firmer sentiment in the Commodity Bloc and EUR; (2) Rising US political risks – Trump impeachment risks in a presidential election year in 2020 likely poses significant challenges to President Trump’s economic agenda; (3) Risks of a deeper global economic slowdown with US possibly leading the way Citi analysts comment that while it is appropriate to price-out some of the more extreme pessimism for US growth prospects, risks to US activity and inflation remain balanced to the downside. With other central banks constrained, only the Fed is in a position to deliver significant monetary stimulus – thus likely leading to USD weakness. While JPY & Gold likely to remain resilient as – (1) Uncertainties abound even  if US – China tensions de-escalate somewhat and Brexit is resolved as rising US political risks and the prospect of a deeper US led global slowdown drive volatility in 2020; (2) Japanese life insurance companies to look for more domestic rather than overseas opportunities in equities and fixed income next FY that limits any selloff in JPY.  

 

  • USD: The week ahead - US aims for a deal with China this week, but uncertainty persists. Citi analysts expect tariff decision on EU auto exports to the US to be delayed indefinitely. Data wise, strong US retail sales, but weak industrial production should continue the strong consumption/weak manufacturing narrative. Citi analysts expect headline CPI at 0.3%MM, core at 0.198%. FOMC speakers include Chair Powell and Vice Chair Clarida           

 

EUR & GBP: Germany – recession risks lower bar for fiscal response; Euro and sterling seen resilient       

 

  • EUR: Citi analysts now see an imminent recession in Germany following last week’s poor German factory orders and industrial production data. This likely boosts the case for fiscal stimulus – the German government’s financial situation allows – and the economic situation justifies – stimulus. However, rushed stimulus could end up being counter-productive and would therefore need to wait for changes to EU budget rules before a well – thought out fiscal stimulus program is delivered.  

 

  • EUR: Resilience despite recent reversal as (1) Citi analysts expect a German technical recession lowers bar for fiscal stimulus – German finance minister has put a fiscal backstop by saying he would act if outlook worsens significantly; (2) German recession risks notwithstanding, ECB unlikely eases policy again; (3) Possible Brexit resolution; (4) Likely de-escalation in US – China/ EU trade tensions.   

 

  • GBP: Sterling resilience seen across the board should – (1) PM Boris Johnson win an outright majority in the December 12 elections. He has promised to leave EU by the end of January and agree a new relationship by December 2020; (2) Opposition Labor Party win is reportedly set to promise a renegotiation of the political declaration and a confirmatory referendum within 6 months which means a “No Deal” is ruled out. However, the prospect of less market friendly Labor economic policies likely limits gains; (3) Fiscal space after election Citi analysts expect BoE to hike rates if voters deliver a decisive majority (either way) on 12 December.  But note the risk: A hung UK parliament – we are back to square one, nothing is resolved and Brexit remains in limbo.   

 

Commodity Bloc: Canadian employment pulls back          

 

  • CAD: Canadian employment falls 1.8k in October and unemployment rate remains at 5.5% while  wages rise to 4.4%YoY. While slightly softer-than-expected, the Canadian October employment report follows two months of very strong job growth and does not change the Citi analyst view of a still-strong labor market and the BoC remaining on hold in December and throughout 2020. This week, Canadian existing home sales for October are unlikely to alter the recent trend of strengthening housing activity. BoC Governor Poloz speaks on Thursday, but is unlikely to alter his stance.  

 

  • AUD: Resilient versus USD and potentially the outperformer within commodity bloc as - (1) messages from RBA Governor Lowe have been more positive lately; (2)  Australian government’s more aggressive fiscal policy underpinning the mild optimism conveyed by Lowe; (3) Prospects for a de-escalation in US – China trade tensions (notwithstanding Friday’s setback) improves an already strong external (trade) backdrop. Risks however lie more medium term on talk of RBA implementing QE following the next RBA rate cut (to 0.5%) if inflation and employment do not lift. Key event this week is the RBNZ board meeting - RBNZ is expected to hold rates unchanged.       

 

Asia FX: Week Ahead – China  

  • CNY: In China, Citi analysts expect industrial production to pull back to 5.2%YY in October (consensus 5.4%), retail sales at 8.0%YY (consensus 7.8%), Fixed Asset Investment to moderate to 5.3%YY YTD in October (consensus 5.4%).   

 

 

This is an extract from the Daily Currency Update, dated November 11, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

 

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