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Saturday, September 18, 2021

USD gains as Fed speak pushes back on negative rates and amid the war of words between US & China

USD: Enjoys a broader bid overnight, alongside somewhat higher yields and choppy equity markets as US rates reflect some fading of the negative rates story (though markets are still pricing negative in 2021).

This comes as Fed speak from Evans and Bostic attempts to pushback on negative rates with the former seemingly taking a more bullish stance on prospects for a US H2’2020 growth rebound.

CNY: War of words between US and China continues to escalate as President Trump says he is “very torn” about whether to end the Phase One US-China trade deal and will assess that effort within this week.

This seems to be a turnaround from Friday when top negotiators from both sides reportedly vow to renew efforts to implement the phase 1 deal. WSJ also reports the FBI and US Department of Homeland Security may issue an alert on China hackers.

Meanwhile China attempts to fight back with the Global Times (China-state owned news outlet) reporting “more hawkish voices are emerging within China on the phase one trade deal, with some calling for new negotiations and a tit-for-tat approach on spiraling trade issues.”

Monday’s negative developments are expressed via a broad based modest USD rally against Asia EM FX and Commodity FX (AUD, NZD & CAD).

CAD: Better news on oil fails to lift CAD – WTI climbs to as high as $25.50 before retreating somewhat as a Saudi energy ministry official says the ministry is directing its state oil producing arm to unilaterally reduce its crude oil production for June by an extra one million barrels per day on
top of reductions already committed under the OPEC + deal.

EUR: ECB President reaffirms need for joint EU fiscal response as Italy IP collapses – EUR lower – ECB chief Lagarde warns that unless “each [member state] is able to respond as necessary we risk widening asymmetries and exiting this crisis with greater economic divergence. This
underscores why a common European fiscal response is so desirable”. ECB’s Schnabel in La Reppublica also argues “we are undeterred in our willingness… to act”, and “committed to countering such fragmentation with appropriate policy measures”.

EUR: Meanwhile, Italian industrial production drops 28.4% MM in March with Citi analysts seeing another large decline likely in April. The “silver lining” though comes as Moody’s delays Italy’s rating review, though DBRS changes Italy’s outlook from stable to negative. Citi analysts see risks to
the Italian rating firmly to the downside and highly dependent on ECB continuous support.

USD: Pace of global recovery to be gradual – despite the gradual and partial re-opening of many economies and modest easing of social distancing, recovery will likely be gradual. Citi analysts expect most economies not to return to pre-COVID-19 GDP levels before at least 2021. Risks going forward include:

(1) Greater-than-expected virus impact from COVID-19 as economies start to reopen, leading to uneven economic recovery

(2) Potential political tensions, including greater trade friction between US and China

(3) Any change in focus of policymakers to do “whatever it takes” to
support the economy in the face of the COVID-19 crisis especially as the shelf life of many US stimulus programs (PPP loans and unemployment benefits runs out in June/ July.

CNY: US – China tensions and likely US measures against China – Investors widely expect US – China tensions to increase into the November US election. The main question is what President Trump is likely to do. Ratcheting up tariffs once more, at a time when the economy is on its knees, is presumably not on top of anyone’s list, especially to the extent that China’s retaliation may well be targeted at the economies of important battle-ground states. More likely, actions may be less impactful and limited to:

(1) curbing capital flows into China (restricting US investments, be it public or private, also using US based index providers)

(2) export controls (maybe again targeting Huawei, or more broadly the semiconductor sector).

Week Ahead – US phase 4 stimulus, Fed speak, RBNZ and Brexit talks

USD: Phase 4 fiscal stimulus headlines continue ahead of the US House returning to Washington this week. House Speaker Pelosi plans to hold a vote on her chamber’s version of the bill on May 14 that is likely to be under USD1tn, mostly consisting of state and local aide. Data wise, markets will likely look through plunging US retail sales, industrial production and core CPI deflation to focus on the debate on whether the Fed can cut rates into negative with nine instances of Fed speak scheduled this week (2 of which spoke overnight – Evans and Bostic).

EUR: This week sees euro-area and UK GDP and industrial production that will likely look bad, before turning worse next month. Meanwhile, the UK and the EU will hold Brexit negotiations throughout the week. Several BoE and ECB representatives will also hold speeches.

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