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EUR still a buy on dips” in 2020 notwithstanding Friday’s reversal; Dips in GBP likely to be shallow on any near term MPC rate cut

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EUR still a buy on dips” in 2020 notwithstanding Friday’s reversal; Dips in GBP likely to be shallow on any near term MPC rate cut                                           

  • EUR: EURUSD’s 50 pip drop to sub 1.1100 Friday may in part be due to broad based gains in USD but there also appears to be subtle change in sentiment regarding the ECB. This is because EUR’s losses Friday are also accompanied by a widening in UST – Bund yield spreads (US Treasuries yields rise while German Bund yields fall as euro short rates decline) perhaps due to apprehension ahead of the euro zone PMI releases this week, but perhaps also from statements from the ECB minutes last week, in particular, the comment that  “that policy rates have not yet reached the so-called reversal rate”. Citi analysts however, still maintain their outlook for no further ECB rate cuts. Focus shifts to this Thursday’s ECB board meeting following which the markets’ dovish interpretation of the ECB minutes may start to fade.          
  • GBP: Citi analysts expect the UK will leave EU on 31st January and then exit the EU single market and customs union with a rudimentary free trade deal in December 2020. However, Citi analysts see the UK outlook as a tale of 2  halves — growth and sentiment may rebound near term but if uncertainty builds into a new December 2020 Brexit deadline, then the team expects the UK economy may slow once again that likely pushes the BoE to a 25bps insurance cut by August (not at the January 30th meeting).  Note though that UK rates are now pricing 19bps (76%) of cuts for the January 30th meeting and 35bps of cuts by the end of the year. This potentially appears rather aggressive and any backup in rates could prove GBP supportive.
  • USD & JPY: The week ahead in the US sees potential for US-EU trade tensions to re-emerge if a deal on digital tax is not achieved. Focus will also shift to the Senate's impeachment trial of President Trump (starts Tuesday). Data wise, Citi analysts expect US existing home sales data to come in solidly. In Japan, the BoJ is expected to leave policy unchanged at its Board meeting scheduled on Jan 20-21. Data wise, Citi analysts expect Japan nationwide core CPI at 0.8%YY (consensus 0.7%YY).                      

 

EUR: Week Ahead – Euro zone & UK        

  • EUR: In the euro zone this week, the ECB Board meeting is expected to keep policy unchanged though markets will watch the Lagarde press conference closely given the statement from  the ECB minutes that “the policy reversal rate has not been reached yet” as well as any comments regarding the formal start of the strategic policy review. Equally important are the releases of German manufacturing PMI (Citi analysts expect a pick up to 44.5 as does consensus), euro zone manufacturing PMI (Citi analysts expect a pick up to 47.4 versus consensus at 46.8) and the January German ZEW survey (consensus at -13.5 versus -19.9 prior for Current Situation and consensus at +15.0 versus +10.7 prior for Expectations).
  • GBP: In UK this week, markets will watch labor market data, the last before the January 30th MPC meeting but more important will be the UK PMI reports for January (preliminary). Consensus looks for 48.8 versus 47.5 prior on UK manufacturing PMI, 51.1 versus 50.0 on UK Services and 50.7 versus 49.3 on UK Composite PMI. The reports will be watched closely by the BoE MPC ahead of its January 30th meeting (where UK rates currently discount a 76% chance of a MPC rate cut) and the data will need to be well above consensus (in particular manufacturing PMI > 50.0) for rate cut sentiment to fade.      

 

Commodity Bloc: Week Ahead – Australia, NZ and Canada       

  • AUD: Australia December Labor Force: Citi employment forecast; 5k, Previous; -39.9k; Citi unemployment rate forecast; 5.2%, Previous; 5.2% - with the unemployment rate expected to remain well above RBA’s 4.5% estimate of NAIRU, the Bank is set to maintain its easing bias and likely cut the cash rate by 25 bps in the February Board Meeting. As a result, AUD may struggle in coming weeks as AUD rates currently price only a 50% chance of a February RBA rate cut. 
  • NZD: Q4 CPI: Citi forecast; 0.5%, Previous; 0.7% - At 0.5% for Q4, this is 0.3pp above the RBNZ’s 1.6% forecast and if delivered would likely produce yearly CPI results above the 2% mid-point in H1’20. Higher NZ inflation should keep the OCR at 1.00%, not just at the 12 February policy announcement but likely for all of 2020.
  • CAD: The BoC meeting on Wednesday should see rates remain unchanged. Headline Canadian CPI should continue to rise and Citi analysts also expect a solid rebound in November retail sales.         

 

Asia EM: Week Ahead - Singapore          

  • SGD: Singapore CPI (% MoM) December: Headline - Citi 0.2%, Prior 0.3%; CPI (% YoY)  Citi 0.8%, Prior 0.6%; CPI Core (% YoY)  Citi 0.6%, Prior 0.6% - On a MoM basis, Citi Research see core inflation rising 0.3%. In YoY terms. This translates to 0.6% in December and 4Q19 respectively – tracking below MAS’s implicit forecast for 4Q19 (though still seen averaging slightly above 1% in 20E).    

 

This is an extract from the Daily Currency Update, dated January 21, 2020. Please approach a Citigold Relationship Manager if you would like more information.

 

 

 

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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

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