5 drivers of the sharp rally in risk sentiment overnight and the strong accompanying selloff in USD

5 drivers of the sharp rally in risk sentiment overnight and the strong accompanying selloff in USD                     

• USD: Fed Chair Powell allaying fears concerning the rift between the US Treasury and Fed - by assuring markets that the Fed has adequate recourse to emergency lending facilities under the non-CARES Act via the Exchange Stabilization Fund even as it returns the unused portion of funds allocated to its lending programs backstopped by the CARES Act (USD465bn) at year end.                        

• USD: A broader chorus among key figures outside Congress including Treasury secretary nominee Janet Yellen, Fed Chair Powell, and president-elect Joe Biden encouraging both Republicans and Democrats to seek a bridge on fiscal stimulus. This comes as various US senators mull the prospect of attaching stimulus to a broader government spending omnibus bill December 11. And while there still remains a material rift over the size of any fiscal package, nonetheless, bipartisan tones begin to take shape overnight as both sides seem to agree on the need for action near term. 

• USD: US Attorney General Barr confirming no election fraud –says the Department of Justice has not uncovered any widespread fraud associated with earlier US elections. The announcement is notable given Barr is hailed as a significant ally of President Trump. Barr’s announcement seems to confirm a silent paradigm shift in which the Trump administration may have quietly accepted defeat. Much of the US election risk now looks to be priced out – but the development nonetheless confirms the consensus outlook that contested election fears are likely largely history.

• USD: Approaching Covid-19 vaccine approvals - approvals for the leading vaccine candidates appears very likely soon. UK is likely to be the first developed country to approve a Covid-19 vaccine, with a possible announcement as soon as this week and rollout likely before Christmas. The US is next followed by the EU which could give its first approval around year-end. 

• GBP: Brexit tunnel speculation - Times Radio Chief Political commentator suggests Brexit negotiations may have entered the most important stage - the so-called tunnel and tweets - "UK-EU trade deal talks have, at long last, entered the mythical tunnel. EU negotiator Michel Barnier has stopped internal debriefs to the wider EU, his last was on Friday. Hopes (on both sides) of a deal by the end of this week - but could still yet all fall apart”. Neither side formally confirms tunnel status yet but also does not deny it either with sources saying - “Outstanding issues remain, negotiations continue” but….if it looks like a tunnel, and sounds like a tunnel, it's a tunnel".     

RBA meeting - improved outlook but no rate hikes for a long time     

• AUD: RBA board meeting – keeps all policy levers unchanged yesterday following a comprehensive longer dated asset purchase (LSAP) program in the previous meeting in November. Therefore, the cash rate, the 3-yr ACGB yield target and the TFF rate remain at 0.1%. RBA becomes more optimistic on the outlook - main changes to the statement center around recent data having been generally been better than expected, which replaces the comment “positive GDP growth is now expected in the September quarter”.  But the RBA does not go any further, warning of the recovery being uneven, drawn out “and dependent on significant policy support”. RBA sees pre-Covid levels of activity by the end of 2021 but Citi analysts expect this point to be reached earlier, most likely in Q2 2021.  

• AUD: Despite the improvements, the RBA likely won’t be in a hurry to lift rates – the Bank has more recently stated it would put greater weight on unemployment rather than just inflation and is “not expecting to increase the cash rate for at least 3 years”. Policy options for 2021 – a move to negative rates looks highly unlikely and 0.1% now likely represents the Bank’s new lower bound. However, Citi analysts expect the RBA to expand its LSAP mid-next year, largely to constrain the upward pressure on the AUD currency in 2021.  

Data releases overnight    

• USD: Strong ISM manufacturing signals expansion - ISM manufacturing at 57.5 in November comes in just below consensus. New orders and production both decline slightly but remain close to all-time highs at 65.1 and 60.8, respectively but employment falls from 53.2 to a contractionary 48.4. However, the overall strong ISM confirms signals from PMI and “hard” data on durable goods orders and shipments – that US manufacturing is likely to extend robustly into November and beyond.      

• EUR: Euro area – Covid still tests inflation negative - euro area headline HICP inflation comes in unchanged at -0.3% YY in November, a tad weaker than consensus (-0.2%, Citi: -0.3%) while core HICP is stuck at an all-time low of 0.2% YY. With recent euro appreciation also likely to progressively impart disinflationary pressures, core HICP inflation could drop to 0% or below in coming months.     

• GBP: Citi/YouGov Inflation Tracker - UK households’ long-term inflation expectations moderate slightly in November to 3.4% according to the Citigroup/YouGov Inflation Tracker. However, short-run (1Yr) inflation expectations rise further to 3.3% - their highest level since 2011 with further increases likely to suggest challenges while 5-10 years ahead households inflation expectations at 3.4% follows a sharp jump to 3.6% in September and still well above the 2.9-3.1% corridor they had oscillated within since August 2019 but now back within the 2.4% to 3.4% range since 2016.   

• CAD: Details of softer Canada’s Q3 GDP indicate strong underlying domestic demand - Q3 GDP comes in lower than expectations with a 40.5% quarterly annualized increase (47.9% expected). This still represents a sharp bounce back from the Q2 decline with the recovery largely driven by household consumption rising 62.8% in Q3. Softer Q3 GDP and Statistics Canada's estimate for 0.2% GDP growth in October leave Citi analysts more confident that the Q4 slowdown will not result in a contraction of GDP. For now, the team expects 2.5% GDP growth for Canada in Q4.     

This is an extract from the Daily Currency Update, dated December 2, 2020. Please approach a Citigold Relationship Manager if you would like more information.