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Brexit: The final countdown – talks on a knife-edge

--> Brexit: The final countdown – talks on a knife-edge
  • GBP: Overnight sees sterling disappointment due to lack of progress on Brexit talks regarding the well-known 3 key items (fisheries, level playing field and governance). This leads EU Commission President von der Leyen to announce - “…conditions for an agreement are not there due to remaining differences on critical issues. We have asked our Chief Negotiators to prepare an overview of the remaining differences to be discussed in person in the coming days.” UK also passes its Internal Market Bill in the House of Commons overnight that would override parts of the Withdrawal Bill signed by the EU and UK during phase one of the talks and will send it back once again to the House of Lords for consideration. UK will also table a Taxation Bill tonight that contains clauses that could violate the Northern Ireland Protocol within the Withdrawal Agreement.

  • GBP: Do these UK internal bills matter? Only if there is a no deal Brexit, otherwise, it is quite likely that the UK House of Lords rejects these internal bills once again (as they did earlier) or PM Johnson decides to remove them if a Brexit deal is agreed upon.  Is this week make or break? In theory, the only hard deadline is the end of the Transition Phase at 31 December, 2020. Media sources suggest the European Parliament could sit as late as December 28 in order to ratify a deal while a technical extension could also emerge if a deal is reached in the final week of December. In practice however, this week is key as it is vital to get some idea about whether a deal is possible, ahead of the 10-11 EUCO Summit where Brexit would feature as the main topic        


Data releases overnight              

  • CNY: China’s exports soar on strong holiday shopping - In USD terms, China’s export growth soars from 11.4%YoY in Oct to 21.1%YoY, much higher than Citi and consensus (Citi: 12.5%, market: 12%), possibly benefiting from strong shopping demand during this holiday season and the low base last year. Meanwhile, import growth slides slightly by 0.2 ppt to 4.5%YoY, underperforming consensus (Citi: 6.8%, Mkt: 7%), on slowing commodities and agricultural goods imports. As a result, the trade surplus jumps sizably from US$58.4bn in Oct to US$75.4bn in November.         

  • CNY: Citi analysts see the very strong export growth in all major export categories due to expected strong holiday shopping demand in China’s key trading partners. However, this is unlikely to be repeated as the vaccine rollout in the US and Europe from mid-December onward will likely return expenditure on services and travel back to normal in Q1.        


Week Ahead           

  • USD: US CPI MoM – Citi: 0.2%, median: 0.1%, prior: 0.0%; CPI YoY – Citi: 1.1%, median: 1.1%, prior: 1.2%; CPI ex Food, Energy MoM – Citi: 0.1%, median: 0.1%, prior: 0.0%; CPI ex Food, Energy YoY – Citi: 1.5%, median: 1.5%, prior: 1.6% - Citi analysts expect a modest increase of 0.09%MoM in core CPI in November following a softer month with prices close to unchanged in October.          
  • USD: US PPI Final Demand MoM – Citi: 0.2%, median: 0.1%, prior: 0.3%; PPI Final Demand YoY – Citi: 0.7%, median: 0.7%, prior: 0.5%; PPI ex Food, Energy MoM – Citi: 0.1%, median: 0.2%, prior: 0.1%; PPI ex Food, Energy YoY – Citi: 1.5%, median: 1.5%, prior: 1.1%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.2%, median: 0.2%, prior: 0.2% - PPI final demand and core measures should rise solidly in November, indicating underlying trend of inflation has not weakened significantly.
  • USD: University of Michigan Sentiment – Citi: 79.4, median: 76.0, prior: 76.9; University of Michigan Inflation Expectations 1y Ahead – Citi: 2.7%, median: NA, prior: 2.8% - Citi analysts expect the University of Michigan consumer sentiment indicator to increase in December though  elevated virus cases and subsequent new activity restrictions could weigh on current conditions while optimistic vaccine news could boost the future expectations components of the survey.
  • EUR: ECB board meeting - Citi analysts expect the ECB to put growing emphasis on financial stability and increase the PEPP envelope (circa €650bn) accompanied by a clear statement that this envelope may be spent only in the amounts necessary to stabilize yield curves. TLTRO – Citi analysts expect subsidized TLTROs to be available through the pandemic, but the subsidized rate is unlikely to be lowered further. ECB HICP Forecasts? More Undershooting – Citi analysts expect the focus to be on 2023 HICP mid-point and the gap between ECB’s forecast and its medium term inflation objective is expected to remain substantial.
  • EUR: German ZEW Expectations, December: Forecast: 46.0, Prior: 39.0; ZEW Current Assessment, December: Forecast: -62.0, Prior: -64.3 - arrival of Covid-19 vaccines should boost financial analysts’ expectations for the German economy. It will be interesting to see the sectoral distribution of profit expectations - Citi analysts expect manufacturing sectors to do particularly well.
  • EUR: Bank of France Business Sentiment, November: Forecast: 95, Prior: 97 – Citi analysts look for a second successive drop in the confidence measure for the French manufacturing sector, worth around 2 points to a five-month low of 95 in November. As a result, confidence in 4Q-20 will likely be much lower than in 3Q-20, with some obvious negative consequences on hiring and investment, although better news about the arrival of some vaccines in early 2021 ought to limit the increase in uncertainty.  
  • CAD: Bank of Canada meeting – Citi: 0.25%, median: 0.25%, prior: 0.25% - following adjustments to the BoC’s bond buying program in October, Citi analysts do not expect any substantial changes to policy at the December BoC meeting. Messaging around the economy though could slightly dovish, given risks to activity due to new business closures and activity restrictions.  


This is an extract from the Daily Currency Update, dated December 8, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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