Covid risks trump vaccine news, re-starting US fiscal talks trump Covid risks: Result – a modest risk positive session overnight

Covid risks trump vaccine news, re-starting US fiscal talks trump Covid risks: Result – a modest risk positive session overnight              

• Safe Havens (USD & JPY): USD and JPY find a safe haven bid in the first half of the overnight NY session as coronavirus concerns trump recent vaccine optimism with investors eyeing developments in New York City regarding school closures and Japan adding to the negative sentiment, after Tokyo raises its virus alert to the highest level possible following >500 new daily cases. USD and JPY gain with the latter outperforming as Japan says it is renewing the per day record and signals that the virus spread is accelerating and heading into a 3rd wave in the winter season.            

• Safe Havens (USD & JPY): Sentiment reverses in the 2nd half to a more “risk on” (USD negative) as Senate minority leader Chuck Schumer signals Republican Senate leader Mitch McConnell has agreed to resume discussions on fiscal aid with key Republican leaders such as Lindsey Graham now seeing the need to raise stimulus higher that their original USD500bn target. As a reminder, Democrat House speaker Nancy Pelosi has previously argued in favor of a USD2.2tn stimulus bill.   

Citi analysts update their Gold outlook

• GOLD: Positive COVID-19 vaccine developments may slow but not end the secular gold bull cycle without a hawkish pivot in US monetary policy - assuming bullion closes 2020 around ~1900, price returns this year would likely outperform the average annual returns during multi-year gold bull cycles in the post-Bretton Woods era (1971-1980; 2001-2007; 2009-12). Furthermore, if deflated by the CPI index, gold in real USD terms is still 30-35% below 1980 peaks. This suggests scope for further gains with the Fed anchored at the zero lower bound and with non-traditional players such as family offices, insurance firms, and pension funds now also looking at gold.

• GOLD: USD depreciation may be the next catalyst for gold coupled with a rebound in EM retail demand - to be sure, gold supply/demand balances have loosened in recent months amid a sharp drop in official sector purchases, weak ETF buying activity and a steep jewelry market recession. But EM gold consumption looks more promising in 2021 on the back of a credible vaccine and improving purchasing power. A bearish USD outlook might further enhance the use of OTC gold as a macro overlay and currency hedge. When is the Gold rally likely to end? One could argue that gold markets will rally until FOMC lift-off. But that ignores other drivers for gold such as the sheer size of the Fed balance sheet and how ~$8.5Tn of holdings in 2021 could ever start normalizing, the outstanding stock of negative yielding debt globally, and the penchant for central bank gold reserves.       

Data releases overnight – solid hiring continues in US and Australia           

• USD: US weekly jobless claims still falling as economy keeps hiring -  US continuing jobless claims fall for an eighth consecutive time to 6372k the week of November 7th from 6801k the prior week. Rapid declines in continuing jobless claims (including both state and federal programs) suggest a solid pace of rehiring in the US extending into the November reference period. The November jobs report, released in early December, is likely to be a key data point for the Fed. Another month of strong gains may keep the Fed comfortable with current policy settings at the mid-December meeting.         

• USD: Strong housing data continues - US existing home sales rise to 6.85-million (annualized) in October, stronger than the decline to 6.47-million consensus expected and US home prices rise close-to-16%YoY in October, the fastest pace of increase since 2005. Another strong month of existing home sales continues the trend of persistent strength in US housing data, suggesting residential investment will again contribute positively to real GDP growth in Q4. Citi analysts expect a similar trend in existing home sales in coming months but eventually expect a pullback in housing activity to more-normal levels in 2021.      

• AUD: October labor force data shows Australia has recovered 75% of jobs lost - Australia’s October’s labor force data smashes expectations as employment increases by +178.8k versus consensus for a decline of -27.7k (Citi; -20.1k). So far, the economy has recovered around 75% of jobs lost since the pandemic even as the unemployment rate in October rises from 6.9% to 7.0% but below 7.1% expected by markets. Encouragingly, the labor force participation rate also picks-up sharply by 0.9pp from 64.9% to 65.8%, accounting for the rise in the unemployment rate. Overall, the total labor force is now back around its pre-pandemic level, with the total number of unemployed sitting at 961k, compared to ~700k before the pandemic. The RBA has suggested in its updated Statement of Monetary Policy that the jobless rate is likely to continuously increase to 8%. However, Citi analysts maintain their central view that the unemployment rate will likely peak at 7.4% and no longer see upside risks to that forecast. The rapid reopening of the Australian economy, the continued fiscal support, low interest rates and a large savings buffer built up over Q2 and Q3 suggest the consumer will continue to smooth consumption over. This is expected to continue to lead to job growth in coming months, although the rate will likely slow in 2021.                        

Key events/ data for the remainder of this week         

• EUR: Euro area Consumer Confidence, November Flash Forecast: -20.0, Prior: -15.5 – Citi analysts expect November to see a meaningful 4.5pt drop in household sentiment across the euro area to -20.0 (lowest since April), following the announcement of stricter social distancing measures since the end of October in most member states. In the event of better news on the vaccine front in the next few days, risks to the Citi analysts forecast would likely be to the upside.   

• GBP: Retail Sales, October Forecast: -0.4% MM, 4.0% YY, Prior: 1.5% MM, 4.7% YY; Ex Auto Fuels, October Forecast: -0.5% MM, 5.7% YY, Prior: 1.6% MM, 6.4% YY – Citi analysts expect the first monthly contraction in retail sales this month since April. However, a larger fall in November is likely as lockdown restrictions combine with the loss of traditional boosts to sales in the run up to Christmas.    

This is an extract from the Daily Currency Update, dated November 20, 2020. Please approach a Citigold Relationship Manager if you would like more information.