USD Vulnerable to Continuing Trade Tensions

USD vulnerable to continuing trade tensions                        

• USD vulnerability to US-China trade tensions remains even as trade tensions lowered somewhat last week. US Commerce Secretary Wilbur Ross in a Bloomberg interview on Friday confirms the next Trump trade announcement will be about China’s targeting of intellectual property and that it will be issued ‘shortly’. Citi analysts point out that over the next few months, the announcement of Section 301 tariffs, Chinese response, or a potential delay in the implementation of Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) could bring trade tensions back to the front.

   

• The US February core PCE – the Fed’s preferred inflation gauge – was also released on Friday, coming in at 0.228%MoM unrounded and 1.6%YoY for the biggest gain since April 2017. This reinforces the view that US inflation has rebounded and which could see core PCE potentially jump to 1.9% YoY in March as base effects turn more positive. But Citi analysts expect core PCE MoM readings to slow thereafter, which is likely to keep Fed hikes gradual (3 hikes for 2018 that are fully discounted into market pricing) and expected to offer little additional support to USD.

GBP: Sterling now discounting little or no Brexit risk premium, potentially vulnerable to disappointment

• In the UK, Q4 GDP data comes in unrevised, staying at 0.4%QoQ and 1.4%YoY as expected. But sterling’s focus remains on Brexit developments with UK’s Trade secretary Fox saying on Friday that a Brexit transition period beyond 2020 is unlikely. This raises the risk for disappointment as Fox’s comments raise concerns that there may not be enough time for the EU and UK to fully agree to a trade agreement by October before commencement of a 1 year transition beginning March 2019.

Commodity Bloc: Negative Canadian GDP still leaves BoC on track to hike in July; NAFTA optimism sees CAD outperformance versus AUD

• Canada’s January GDP print released Friday misses expectations at -0.1%MoM (vs. 0.1% consensus) which drags the year-on-year print down to 2.7% (vs. 2.9% expected). The weakness though is tempered by small upward revisions to the December numbers. Citi analysts see the GDP contraction implying softer Q1 growth though with slightly more positive details, still leaves the BoC on track to raise rates in July.

   

• No change is expected to rates or statement at this week’s RBA policy meeting. In Canada, the NAFTA eigth round of negotiations start April 8th. US trade representative Lighthizer has hinted that remaining issues can be resolved “in the next little bit” and Canadian PM Trudeau is also optimistic. However, Mexico’s Economy Minister warns that if a deal cannot be struck by April end, negotiations will likely drag until year end. Citi analysts expect a successful renegotiation of NAFTA and a signed agreement completed ahead of the Mexican Presidential election in July.

Asia EM: China cuts taxes to support manufacturing amid external challenges that also raises risk of greater pushback on CNY strength

• China’s State Council announces that starting from May 1 certain VAT and sales taxes will be cut. But Citi analysts do not see the tax cuts as amounting to fiscal easing as they are already part of the fiscal plan and reflected in the government budget. Instead, Citi analysts think the overall fiscal impulse could be somewhat weaker than last year and amid tighter control of local government financing, this raises the risk of greater PBoC pushback on CNY strength.

   

• The China FX reserves for March will be released this week – a 1.8%MoM depreciation in the USD Index (DXY) and strong market sentiment on RMB attracting capital inflows sees Citi analysts expecting FX reserves to rise by another USD 19.6bn to USD 3,154.1bn.

This is an extract from the Daily Currency Update, dated 2nd April 2018. Please approach a Citigold Relationship Manager if you would like more information.