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FX

Strong US Data Amid Dovish Fed Supports a Rally in Risk Assets

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Strong US Data Amid Dovish Fed Supports a Rally in Risk Assets

  • Key highlights include (1) the US economy adding 304K jobs in January, well above consensus for 165K but with a 90k downward revision to December. An increase in the participation rate and addition of temporarily unemployed government workers (due to the partial shutdown) sees the unemployment rate rise from 3.9% to 4.0% while average hourly earnings (measure of wage inflation) gain a subdued 0.1%MoM, less-than-consensus for 0.3%. (2) US ISM manufacturing for January rises from 54.1 in December to 56.5 in January versus 54.0 expected. Details are solid, with new orders rising markedly up to 58.2 from 51.3. (3) The January University of Michigan is revised higher to 91.2, driven by the forward-looking expectations component.

 

  • The week ahead sees Fed member Mester (a traditional hawk but more dovish of late) speaking on the monetary and economic outlook this week. Data wise, US trade balance for December and ISM non-manufacturing are released. President Trump is also scheduled to give the 2019 State of the Union Address in the chamber of the House of Representatives.

 

 

EUR: Modest gains as euro zone core CPI surprises to the upside                                  

  • Key data highlights include (1) Final euro zone manufacturing PMI for January is unrevised at 50.5, taking it to its lowest since Nov-14 and showing manufacturing activity has barely risen at the start of 2019 though Markit also report business confidence has rebounded from Dec-18’s six-year low; (2) Eurozone headline CPI falling from 1.6% YY in December to 1.4 YY% in January due to lower energy prices but core CPI (ex food, energy, alcohol and tobacco) rising from 1.0% YY to 1.1% YY, surprising to the topside (consensus: 1.0% YY). Citi analysts expect headline CPI to fall to a low of 0.9% YY in June, before rising to 1.2% YY by year-end but core CPI to hover around current levels and start picking up in 2H-18 and reaching 1.5% YY by year-end.

 

 

GBP: Brexit preparations hit UK PMI

  • Sterling underperforms within the G10 FX space on Friday after UK January manufacturing PMI declines more than expected at 52.8 vs 53.5 forecast with the weakness attributed to companies busy with Brexit preparations ahead of the March 29 deadline. These preparations have led to sharp rises in both purchasing activity and stockpiling of inputs at warehouses while also seeing a cut in manufacturing jobs due to ongoing concerns about Brexit.

 

  • This week sees euro zone retail sales for December (Citi at -2.6%MM).  In the UK, the BoE’s Monetary Policy Committee meets amid undiminished uncertainty 7 weeks before the UK’s scheduled departure from the EU. In normal circumstances, the MPC might hike the Bank Rate immediately to address the tight labor market and rapidly rising wage growth (and inflation expectations). However, Brexit uncertainty prevents any move for now. Citi analysts maintain a May-2019 call for the BoE to hike rates. Note UK rates price less than a 60% chance of a hike in 2019 and only fully price a hike in Nov’20. This underprices the possibility that the Brexit process may present a window to hike and rates are therefore supportive of sterling on dips.

 

 

Commodity bloc: Strong US data amid dovish Fed supports rally in risk assets and FX; Crunch time for RBA, Canada to watch payroll data 

  • A strong US January jobs report on Friday but with subdued wage inflation (implying limited scope for further Fed hikes) sends a stronger positive signal to risk appetite and risk currencies such as AUD, NZD & CAD. 

 

  • The week ahead sees the RBA meeting that will likely reflect signs of slowdown in the domestic and global economy in its updated macro forecasts and commentary. However, Citi analysts expect it to retain a glass half full view of the outlook and therefore reluctant to move to a more neutral policy guidance. RBA Governor Lowe also speaks later in the week amidst the backdrop of the Aussie rates market pricing increasing risks for a dovish RBA. In Canada, BoC Deputy Governor Lane speaks and Canadian January payrolls data is released on Friday.

 

 

Asia EM: China Caixin PMI slips 

  • China January Caixin manufacturing PMI comes at 48.3 versus 49.6 expected, another indicator of slowing domestic manufacturing as companies are more willing to reduce their inventories that sees their output decline. However, Caixin also notes that China is likely to launch more fiscal and monetary measures and speed up their implementation.

 

 

This is an extract from the Daily Currency Update, dated 4th February 2019. Please approach a Citigold Relationship Manager if you would like more information

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