USD sentiment weak awaiting FOMC statement tonight
- USD: Sentiment in the broad based USD Index (DXY) remains weak in continued pre-FOMC conversations overnight. US data releases do not help either with US Consumer Confidence underwhelming (refer to PP2) while the Fed (on day one of its FOMC meeting) announces a 3 month extension to its seven emergency lending programs through December 31, to support economic activity while perhaps also signaling its concerns about the highly uncertain path of economic US recovery amid rising Covid-19 cases in the US. Gold hits a high of 1981 before pulling back to 1930 but rallying above 1950 once again and a similar path is taken by the rest of G10 FX – a pullback in the Asian and European sessions yesterday and only to recover and rally against USD in the NY session once again. This leaves DXY ending the NY session overnight at 93.70, slightly higher than its low this week at 93.50.
- USD: Fed extends lending programs, FOMC ahead - Fed announces it will extend its emergency lending programs scheduled to expire September 30 through December 31 to prevent a cliff-edge in the fall but also perhaps signaling its concerns about the uneven path of the US recovery. The statement notes that the extension would "facilitate planning by potential facility participants and provide certainty that the facilities will continue to be available to help the economy recover."
- USD: Meanwhile, the phase 4 fiscal stimulus negotiations commence - Senate Republicans unveil a ~USD 1tn stimulus package overnight, kicking off talks with Democrats, who call the delays in the plan a “train wreck”. Unemployment benefits - States would have until October to switch over to a new system in which workers would be paid 70% of their prior earnings. Until then, the federal government would provide a $200-per-week benefit for each jobless worker — down from the $600 currently. Paycheck stimulus - Another $1200 will be sent to most Americans. What it leaves out - NYT flags that the legislation is also notable for what it leaves out, as the GOP opts against including new funding for state and local governments, and hazard pay for essential front-line workers, among other policies pushed by congressional Democrats. The package also leaves out a payroll tax cut (initially wanted by President Trump). The Republican package is worth $1trln but any compromise agreement with the Democrats is not seen until August 7th (Citi analysts).
US consumer confidence dips; US Q2 GDP preview
- USD: US Consumer confidence underwhelms for July, coming in at 92.6 versus 95.0 expected and 98.3 prior. This mirrors the University of Michigan results with the largest declines driven by the larger states who have seen COVID increases (Florida, Texas and California, and Michigan). The survey’s present situation measure, based on consumers’ assessment of current business and labor market conditions, rises to 94.2 versus 86.7 in June but more concerning is the steep drop in expectations based on consumers’ short-term outlook for income, business and labor market conditions that drops to 91.5 from 106.1 in June.
- USD: Long-awaited Q2 GDP decline led by consumption – the Q2 GDP release follows the FOMC decision tonight and Citi analysts expect the data to reflect the worst of the decline in activity due to economic restrictions related to COVID-19 and expect real GDP to fall 31.1% (QoQ SAAR). Just about every component of GDP should be a drag on growth in Q2, with weakness primarily led by consumption business investment, net exports and inventories that will likely be notable drags on growth as domestic production falls.
Week Ahead – FOMC, EZ and Australian CPI, China manufacturing PMI
- USD: Fed FOMC meeting - Dovish risks include either an explicit commitment to overshoot 2% or adopting a very low unemployment threshold (e.g. 4.0%).
- US Initial Jobless Claims – Citi: 1500k, median: NA, prior: 1416k; Continuing Claims – Citi: 16200k, median: NA, prior: 16197k - Citi analysts again expect another increase to 1500k in weekly claims for the week of July 25. However, this increase in initial claims is not a clear sign of rising unemployment, instead, seasonal patterns around the 4th of July holiday result in very unfavorable seasonal factors. Similarly, continuing claims are likely to rise modestly to 16.2 million for the week of July 18 due to seasonal factors (and which is the payrolls survey reference week). However, Citi analysts still expect hiring of at 1 million workers again in July.
- Euro zone HICP Inflation, July Flash Forecast: 0.2% YY, Prior: 0.3% YY - Despite sizable base effects, a likely sharp drop in core HICP from 0.8% YY in June to 0.4% YY in July should push the headline inflation rate lower. The 3pp temporary VAT rate cut in Germany appears to be the main culprit, as it will likely shave around 0.25pp off core euro zone HICP.
- AUD: Australian Q2 CPI Citi headline CPI forecast QoQ; -1.9%, Previous; 0.5%; Citi headline CPI forecast YoY; -0.4%, Previous; 1.8%; Citi underlying CPI forecast QoQ; 0.1%, Previous; 0.5%; Citi underlying CPI forecast YoY; 1.4%, Previous; 1.7% - At -1.9%, Citi analysts forecast the largest quarterly drop in Q2 headline CPI since 1953. Underlying inflation is also expected to remain muted on the back of a decline in employment and wage costs.
- CNY: China Manufacturing PMI July – Citi 51.5, Prior 50.9 – China’s manufacturing PMI could continue to inch up in July. The better than expected 2Q GDP, more fiscal transfers flowing to local government, bull capital market and RMB strength could boost sentiment.
This is is an extract from the Daily Currency Update, dated July 29, 2020. Please approach a Citigold Relationship Manager if you would like more information.