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USD under pressure on dovish Fed speak; Risk sentiment remains mixed on offsetting headlines

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USD under pressure on dovish Fed speak; Risk sentiment remains mixed on offsetting headlines                                    

  • USD: Under pressure on dovish Fed speak - Fed Governor Brainard (traditional hawk) expresses that it is time for the Fed to pivot its forward guidance and asset purchases toward providing longer-run accommodation, amid a resurgence in coronavirus infections that risks the US economic recovery. “A thick fog of uncertainty still surrounds us, and downside risks predominate.” Fed President Harker also follows, noting the economy is in a “stubbornly long lasting downturn,” while Bullard plays both sides saying he sees unemployment falling “substantially lower”, but notes downside risk is nevertheless substantial, and better execution of a granular, risk-based health policy will be critical to keep the economy out of depression.”            
  • USD & CNY: Risk negatives – Covid-19 headline risk plus US/ China & UK/ China tensions (these tensions hit Asia EMFX in yesterday’s session) – (1) COVID-19 headline risk continues to get airplay with the US state of California re-imposing some lockdown measures, while some schools are also to stay closed. As cases and hospitalizations continue to rise this week, headline risk remains skewed to the downside with Texas and Florida in focus. (2) US - China geopolitical tensions also continue to rise. Key developments include China imposing sanctions on a major US arms manufacturer and also upping its language, saying the US is looking to undermine regional stability. This follows the Trump administration’s statement calling Beijing’s claims to offshore resources across most of South China Sea as being “unlawful”. Finally, China also says it will closely watch the Chinese telcos situation in UK as the UK cabinet updates MPs on the final decision about their role in the UK 5G network, with a policy U-turn expected.               
  • USD & EUR: The positives – US phase 4 fiscal stimulus talk, Merkel pushes for “massive” EU recovery fund – (1) A Republican proposal for “Phase 4” fiscal stimulus will likely be ready for release next week, when Congress returns, according to Senate Majority leader Mitch McConnell. Citi analysts expect Congress to pass a ~$1trln package before the August recess begins and enhanced unemployment insurance expires at the end of July. (2) German chancellor Merkel and Italian PM Conte reject a smaller recovery fund and push for a “massive” EU recovery fund instead – the German Chancellor lowers expectations for a summit break-through this week but raises pressure on fiscal hawks to accept the EU Commission proposals (EUR750bn), saying the Recovery Fund needs to be “massive, something special.” Conte also warns against “fragmentation of the single market” without a quick solution.       

  

Data releases overnight                                         

  • USD: US core inflation returns but little risk of overshooting over next 12 months - US core CPI rises 0.235%MoM in June, stronger than median projections for 0.1% and closer to Citi at 0.21%. Citi analysts continue to see more upside than downside to upcoming US core CPI readings. That said, the team sees little risk that inflation in the US will rise to a level concerning for monetary policymakers over the next year. Citi analysts also expect a 0.28% increase in June core PCE inflation (rounding to 0.3%MoM) with the year-on-year measure remaining at 1.0%.         
  • EUR: German ZEW - moderating expectations - the first of the German sentiment indicators for July (ZEW survey) sees investor expectations moderate to 59.3 vs 60.0 consensus and 63.4 prior. After a poor Q2, survey participants expect to see a gradual increase in GDP in H2’20. The current situation component drops to -80.9 vs -65.0 forecast - meaning investors are now less optimistic about current conditions than economists had forecast.   
  • GBP: UK GDP disappoints but faster pickup seen - UK GDP is up 1.8% in May, below expectations (consensus 5.5%, Citi 3.7%) and on a Q-o-Q basis, GDP falls by 19.1% (consensus -17.5%, Citi -17.8%). Industrial production prints at 6.0% MM (Consensus 6.5%, Citi 5.2%) with substantial improvements seen in manufacturing (8.4% MM) but partially offset by reductions in the other components of industrial production – such as mining and electricity production. Services remain weak, growing at just 0.9% MM in May (consensus 4.8%, Citi 2.9%) though likely to pick up as the UK economy reopens through Q3. Subdued now, but faster pickup to come – Citi analysts expect a further and faster pickup is likely in June as more sweeping easing measures come into effect.  
  • CNY: China’s trade data points to a continued rebound; - Most in focus on Chinese trade data is China imports that beat expectations and which points to domestic demand resilience – China’s June exports rise 4.3% Y/Y in Yuan terms (consensus 3.5%) and 0.5% Y/Y in USD terms (consensus -2.0%). Meanwhile, June imports rise 6.2% Y/Y in Yuan terms (consensus -4.7%) and 2.7% Y/Y in USD terms (consensus -9.0%).  The gains appear to be consistent with the improvement shown in the Baltic Dry Index, representative of trade activity.  
  • SGD: Singapore’s 2Q20AE GDP plunges 41.2% QoQ SAAR, -12.6% YoY (Consensus: -35.9% QoQ SAAR, -10.5% YoY). This surpasses the previous YoY low in 1Q09 (-7.8%), reflecting the impact of “Circuit Breaker” and travel restrictions. Signs now are that 2H recovery will remain slow and uneven with another downgrade, or narrowing of the official GDP forecast range likely when final 2Q GDP is released. Fiscal tightening likely in FY21; 30 – 40% chance of another MAS downward re-centering in Oct-20 - Mathematically, a negative fiscal impulse might be difficult to avoid in FY21 without another large draw on Past Reserves, for which the hurdle may be high. Alongside a disinflationary backdrop and rising unemployment, Citi analysts reiterate another MAS re-centering with a 30-40% chance (currently, the SGD NEER prices no expectations of further MAS easing). Key data to watch includes NODX (17th July), CPI (23rd July), IP (24th July). 

 

This is is an extract from the Daily Currency Update, dated July 15, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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