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Dovish Risks for USD

USD: Medium outlook mixed despite modest rebound last Friday


  • The USD’s rebound since Friday in the face of weaker US data appears largely tactical and the medium to longer term outlook remains mixed at best and further negative at worst.


  • Fed President Bostic overnight signals his dots likely stand at 2 than 3 (echoing President Harker’s comments on Friday) and says he will be watching the US yield curve closely. Should it approach inversion, he would argue strongly to be “extremely cautious" with further rate rises.


EUR & CHF: Further strength in eurozone data not yet enough to move the ECB, more FX effects of inflation in Switzerland


  • Eurozone economic confidence ends 2017 at a high of 116.00 vs 114.8 consensus expectations for December. This is the highest level since June 2000 - 17.5 years ago. Looking at a breakdown, business confidence is high across all sectors and supports the trends seen in eurozone PMIs. Meanwhile, German factory orders fall -0.4%MoM in November, missing consensus expectations for 0.0% though a pullback is largely expected after three monthly large increases.


  • In Switzerland, more FX effects of inflation with headline CPI unchanged at 0.8% YY in December, in line with consensus and Citi expectations but core inflation (excluding energy and seasonal products) edges up further by 0.1pp to 0.7% YY, the highest since August 2009 and driven by another rise in non-energy industrial goods inflation from 0.4% YY in November to 0.8% YY. Goods inflation tends to be responsive to movements of the exchange rate rather than domestic inflationary pressures (which appear to be absent). Citi analysts expect further gradual increases in Swiss inflation throughout 2018, largely due to the weaker Swiss Franc.


Commodity Bloc: Citi now sees the BoC raising rates next week following the strong Canadian jobs report last week and BoC loans survey overnight


  • Following Friday's bumper Canadian jobs report (unemployment at the lowest on record going back to 1976), the Bank of Canada (BoC) Q4’17 Business Outlook Survey points to capacity pressures and wage growth even as the headline softens to -6.4 from -0.5 in Q3. 


  • Citi changes its call for the January 17 BoC meeting and now looks for a 25bp hike to 1.25 percent, from 1.00 percent. Markets are pricing in 22bp of tightening next week and BoC Governor Poloz’ recent dovish comments notwithstanding, the likelihood of a hike has risen. Citi analysts cite the September 2017 episode when only a 30% likelihood of a hike was priced in, but the Bank took advantage of a window of opportunity provided by data and markets.


Asia EM: PBoC liquidity injections likely show concerns about CNY strength


  • Following the 2% appreciation in the USDCNY in December, the People Bank of China’s (PBoC) liquidity injections in the domestic money markets in recent days potentially signal concerns over the pace of CNY strength.


  • Meanwhile, with the SGD Nominal Effective Exchange Rate (NEER) trading around 1.3% higher than the mid band, the Monetary Authority of Singapore may steepen the slope at the April meeting. 


This is an extract from the Daily Currency Update dated 9 January 2018. Please approach a Citigold Relationship Manager if you would like a copy

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