Perky yuan/risk appetite exacerbates USD’s woes

21st October 2020 – Macro Daily

Market Update

Risk appetite pretty mixed this morning, with major European equity indices a little softer (Stoxx 600 -0.2%), but US index futures trading with gains (S&P 500 futures +0.4%). US and German bond yields are broadly higher (and curves steeper), as is gold (+0.6%) and crude oil markets (although only very marginally).

Some have pointing to stimulus “jawboning” from Pelosi last night as one reason why US markets might be feeling a little more upbeat this morning; she said last night that her and Mnuchin are “moving closer” to a deal and will speak again today, that she is hopes to reach a deal by the end of the week and that she thinks there can be more Covid-19 aid prior to the election (something which, as some commentators have noted, represents the “best case scenario” from a market standpoint).

Questions still remain over whether any bill agreed on by Pelosi and Mnuchin would be able to pass the GOP controlled Senate; we also had plenty of (albeit mixed) news flow yesterday regarding Senate GOP Leader McConnell’s reluctant stance on stimulus; WaPo reported that he had warned the White House not to pursue a large package, that he doubts it is logistically possible to pass a deal into law ahead of the election and that he thinks a deal is unlikely to get voted on prior to election day. However, reports did indicate he would “consider” any deal presented to him. ING argued yesterday that markets for the most part do not expect any stimulus to pass before the election, thus if (or when depending on how much of a pessimist you are) stimulus talks collapse, risk asset downside out to be limited.

Perhaps the bigger story today is strength in CNY (up 0.5% vs USD) amid the PBoC’s firmest yuan fix since July 2018 of 6.6781 (PBoC measures to reduce the RRR on FX forwards as a means of slowing the appreciation rate of CNY by making it cheaper to short one week ago feel a long time ago already). No particular theme or headline is behind today’s yuan strength (CNH is also up around 0.4% vs USD); rather focus is instead on the ongoing themes of increasingly divergent international growth stories (which increasingly seems to favour growth China vs the US and Europe), as well as a the potentially shift to a more pro-Chinese growth international order that a Biden Presidency would bring.

CNY/CNH strength is hurting USD and G10 FX markets are very much risk on this morning…

G10 FX

The Day Ahead

0830BST/0330EDT, ECB President Lagarde and Chief Economist Lane host an “ECB Listens” event, part of the bank’s broad strategy review.

0830BST/0330EDT, Swedish National Debt Office forecast… According to SEB, “the central government budget balance has been far less weak than expected and we predict the Swedish National Debt Office (NDO) to lower the 2020 budget deficit forecast by SEK 200bn in the revised forecast and financing plan on 21 October.”

1100BST/0600EDT, ECB Vice President de Guindos speaks at a webinar organised by Pontevedra’s Entrepreneurs Confederation and University of Vigo Faculty of Economic and Business Sciences (FEBS)

1310BST/0810EDT, BoE MPC Member Ramsden attends Society of Professional Economists Online Conference 2020: Post COVID – Policy Challenges for the Global Economy “UK Monetary Policy: Issues and Outlook”

1330BST/0830EDT, Canadian Consumer Price Inflation & New House Price Index (Sep), Core Retail Sales (Aug)… TD Sec “looks for inflation to rise to +0.3% y/y in September reflecting base effects, as monthly inflation is forecast at -0.3% m/m compared to last September’s print of -0.4%.” Energy prices will remain a drag on headline inflation, they think, “subtracting roughly 0.4 p.p. from the Y/Y figure as gasoline prices remain approximately 10% below their levels from last September.” In terms of the BoC’s Core measures, TD expect them “to hold around their current average of 1.7% Y/Y, though the persistence of slack in the economy suggests that risks will skew towards lower core CPI metrics.”

1350BST/0850EDT, FOMC Member Brainard speaks on “Economic and Monetary Policy Outlook” before the Post-COVID Policy Challenges for the Global Economy, online conference hosted by the Society of Professional Economists

1400BST/0900EDT, ECB’s Macklouf and Ireland deputy governor Donnery at a parliamentary committee.

1455BST/0955EDT, ECB Chief Economist Lane participates in an online panel discussion at the Workshop on International Capital Flows and Financial Policies

1500BST/100EDT, FOMC Member Mester speaks on monetary policy before virtual Money Macro and Finance Society Annual Monetary and Financial Policy Conference

1530BST/1030EDT, EIA Weekly Crude Oil Inventories… Yesterday saw a surprise build in headline APID Inventories of +0.59mln bbls (exp -1mln bbls), as well as a larger than expected build in Cushing of +1.12mln bbls (exp. +1.1mln bbls). However, Distillates posted a significantly larger than expected draw of nearly -6mln (exp. -1.7mln), and gasoline also drew -1.62mln.

1700BST/1200EDT, FOMC Member Rosengren speaks before virtual Maine Working Communities Challenge Announcement Event hosted by the Federal Reserve Bank of Boston.

1700BST/1200EDT, FOMC Member Kaplan participates in virtual moderated question-and-answer session on “The Current State of the Economy” hosted by the Houston Hispanic Chamber of Commerce.

1700BST/1200EDT, FOMC Member Kashkari speaks on “Amending the Minnesota State Constitution to Guarantee a Quality Education for All Students” before virtual event, “From ‘Adequate’ to ‘Quality’: A Constitutional Amendment for Minnesota

1700BST/1200EDT, FOMC Member Daly participates in moderated question-and-answer session before virtual Professional Speechwriters Association World Conference.

1700BST/1200EDT, ECB Vice President Luis de Guindos speaks on the occasion of the awarding of the Germán Bernácer Prize in an online ceremony organised by Banco de España.

1800BST/1300EDT, FOMC Member Quarles participates in “Financial Stability” panel before virtual Managed Funds Association Outlook Conference.

1800BST/1300EDT, FOMC Member Barkin participates in panel on “Rural Virginia’s Economic Recovery” before virtual Virginia Rural Center Governor’s Summit on Rural Prosperity

1900BST/1400EDT, Fed issues the Beige Book of economic conditions… Nomura think that the Beige Book “prepared for the November FOMC meeting will likely report continued recovery in consumer spending and industrial activity, albeit at a more moderate pace”. They continue; “incoming data indicated continued strength in auto sales and personal service spending as reopening activity continued. That said, consumer spending on goods excluding autos appears to be slowing with fading fiscal support.” While industrial sector data continued to recover, Nomura think that the Beige Book will likely reflect the ongoing concerns over the trajectory of the pandemic and uncertainty over the upcoming US elections. Moreover, they add, “the Beige Book will likely indicate continued commercial real estate sector weakness and further acceleration in housing market activity.” Finally, on the labour market, amid weak incoming data which implies continued moderation in the pace of recovery (plateauing initial unemployment claims in early October), Nomura “expect more anecdotal evidence on the slowdown in labour market recovery and the industry composition of this slowdown.”

2330BST/1830EDT, RBA Assistant Governor Debelle to deliver keynote address and participate in Fireside chat – The future of global code – at FX Week Australia 2020

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