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FX

US jobs and consumer confidence holding up dollar sentiment for now but upside still looking capped

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US jobs and consumer confidence holding up dollar sentiment for now but upside still looking capped   

  • USD: Rebounds Friday after steadying and halts a 6 day down trend in the process as the US November jobs report shows strong gains and the University of Michigan consumer confidence report magnifies the health of the US consumer. Key highlights – (1) US economy adds 266K jobs in November, much stronger than Citi and consensus for 183K and 180K respectively though with the return of striking autoworkers leading to a 41K one-time boost. Wage growth matches Citi’s above-consensus expectation for 3.1% (0.25% MoM) and the unemployment rate unexpectedly falls to 3.5% (from 3.562% to 3.535%) driven by the participation rate falling 0.1pp to 63.2%. Overall, a much stronger than expected payroll growth for a second consecutive month that Fed officials will likely take as confirmation of an “on-hold” stance in December and into 2020. (2) The preliminary University of Michigan consumer confidence survey for December comes in higher than expected.  Headline prints 99.2 vs 97.0 consensus forecasts and 96.8 prior with both current conditions and expectations increasing (the latter rising to 88.9 vs 87.5 consensus). The only caveat is a drop in 5-10y inflation expectations back to 2.3%, which marks 2019 lows.         
  • USD: In the US, focus this week will on the US – China phase one signing before the December 15th deadline for new US tariffs —Citi analysts remain cautiously optimistic. The final FOMC meeting for 2019 is expected to keep rates and median dots for 2020 unchanged but some dots may imply Fed hikes by the end of 2020. Data wise, 0.3%MoM core CPI inflation (consensus 0.2% MM, 2.3% YY) might send a hawkish message while US retail sales for November are expected at +0.5% (consensus +0.4%). Fed speak includes Williams on Friday.          
  • USD Outlook: US consumer perhaps represents the only major support for the economy (and USD) currently. Nevertheless, Fed has signaled its on-hold stance can change on a “material reassessment” of the outlook though this is yet to be seen. Nevertheless, narrowing US growth differentials with other advanced economies could be a potential theme for 2020, coming against the backdrop of US rates not positioned for a US downturn - short rates currently discount a 70% chance of one final 25bp Fed rate cut in 6 months’ at best. And notwithstanding Friday’s USD rebound, our CitiFX Flows team sees USD selling from real money and leveraged accounts while the CitiFX Positioning Indicator shows USD longs at their highest since September.                    

 

EUR: German manufacturing recession continues but investor attention remains on German fiscal stimulus discussions  

  • EUR: Drops 40 pips from its highs above 1.1100 primarily on the back of USD strength but still well within its 1.0970 – 1.1130 range. Key highlights -  (1) German industrial production (IP) drops 1.7%MoM vs +0.1% consensus, driven entirely by a sharp drop in capital goods production (-4.4%MoM). IP accounts for about a quarter of the German economy and the last quarterly increase in IP dates back to 2Q-2018. (2) Attention however shifts to German fiscal policy discussions with the ruling German SPD draft conference highlighting 4 projects to be discussed with its coalition partner CDU/CSU - (a) Closing the investment gap of EUR450bn over ten years (1.3% of GDP), if necessary by dropping the “black zero” budget balance requirement; (b) Beefing up climate package; (c) Minimum wage hike from EUR9.35/h to EUR12/h; (d) New digital package.  
  • EUR, GBP & CHF: This week in UK sees the general election and a Conservative win remains Citi’s base case. In euro zone, the ECB (Thursday) is expected to be on hold. However, attention will be on its new 2022 forecasts Citi analysts think the 2022 HICP midpoint will be sufficiently close to the 'below, but close to, 2%' target to give some breathing space. President Lagarde is also expected to signal commencement of ECB’s Strategic review of its policy objectives in early 2020. In Switzerland, Citi analysts expect SNB to keep rates unchanged at -0.75%. 

 

Commodity Bloc: Canada - Large drop in jobs as manufacturing jobs contract again; NZD up on upbeat RBNZ comments   

  • CAD: The worst performer within G10 FX on Friday as Canadian employment falls by 71k in November vs. consensus for an increase of 10k. The unemployment rate also rises to 5.9% from 5.5% while average hourly wages are unchanged at 4.4%. The decline is the biggest since 2009, particularly in manufacturing. Citi analysts however maintain their view the BoC will remain on hold in 2020 but given the jobs report, it is important to monitor upcoming prints.  
  • NZD: Gets a boost Friday following upbeat comments from RBNZ Deputy Governor Bascand further supporting Governor Orr’s comment that monetary policy “in a hold phase.” Bascand suggests the NZ economy is close to a turning point and although there are downside risks, picture looks more balanced with strong commodity prices supporting economy. He goes on to say new capital rules (for banks) will not hurt the recovery and fiscal stimulus could boost growth next year.    

 

Asia FX: Citi cautiously optimistic on US -China trade deal and RMB

  • CNH: Citi analysts are cautiously optimistic on signing of “phase one” US – China trade deal this week with a likely suspension of December tariffs and with a framework towards removal of September tariffs. But if not this week, then Trump may have an incentive to finalize the deal by Super Tuesday March 3rd (before presidential election heats up). This would likely support RMB with favorable seasonality at the beginning of 2020 due to corporate repatriation ahead of Chinese NY and global asset managers’ tendency to raise allocation to China in January due to on-going index inclusion all adding to support RMB at the beginning of the year.         

 

This is an extract from the Daily Currency Update, dated December 9, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

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