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FX

European Political Risks Seen Driving FX Sentiment to Year-End

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European Political Risks Seen Driving FX Sentiment to Year-End                

  • European political risk dominates FX sentiment Tuesday to drive USD higher against both EUR and GBP starting with (1) the elevated volatility in sterling (that also drags euro lower) on speculation of a challenge to Theresa May’s leadership within her own party. (2) French President Macron’s peace offer to the yellow vest protests that could push France’s budget deficit as a proportion of GDP to 3.5%. (3) This would likely embolden Italy that continues to mull (albeit reluctantly), a softening in its stance on the budget in an attempt to avoid EU Commission escalation (more developments seen tonight when Italian PM Conte meets with EU officials).

 

  • The only good news about a potential challenge to PM May’s leadership taking shape is that it appears to come from within her own party, obviating the need for fresh UK elections in the immediate term if say, the opposition Labor Party were to succeed in a "no confidence" motion against her. The bad news is that any challenge would effectively tie PM May’s hands for a few days/ weeks at a time when a Brexit solution is badly needed before the key January 21 signoff by the EU and UK. The political uncertainty now also significantly raises the chance of a "no deal" Brexit especially following EC President Juncker’s statement overnight that there is no room to renegotiate the Withdrawal Agreement, though additional clarifications on the Irish backstop could come be sought.

 

 

USD: The main beneficiary from political tensions in Europe despite building USD negatives

  • USD benefitted from safe haven flows out of EUR and GBP even if the news from the US itself is more biased negative though largely ignored for now. For the record – (1) The US government shutdown debate returns to focus on Democrats Nancy Pelosi and Chuck Schumer refusing to give in on Trump’s USD5bn wall proposal but with Trump threatening a shutdown if his demands are not met. (2) US PPI showing limited signs of tariff-related price increases with a benign 0.1%MoM rise in November which leads Citi analysts to expect US core PCE will also likely remain benign at just below the Fed’s 2% target going into 2019. (3) The closely-watched US NFIB small business optimism print coming in at its lowest level since April. (4) Further signs of thawing in US – China trade tensions (risk positive/ USD negative) after China’s Ministry of Commerce confirms Vice Premier Liu telephoning US Secretary of the Treasury Mnuchin and USTR’s Lighthizer to discuss pushing forward the timetable and roadmap for the next round of trade talks. Further news follows with Bloomberg reporting that "China is said to move on car tariffs" to reduce from 40 to 15% in coming days. Markets await tonight’s US November CPI report.

 

 

Commodity bloc: Range bound but resilient

  • Further positive developments on the US – China trade front coupled with talk of additional stimulus in China (including a possible interest rate and RRR cut), supports AUD overnight, but gains are muted following a warning that changing the negative gearing policy by the opposition Labor Party should it win government "could tip Australia into recession".

 

 

Asia EM: China - Policy stimulus may finally be starting to work                                     

  • More talk yesterday about additional stimulus from the PBoC China (including a possible interest rates and RRR cut), with Bloomberg reporting that there’s room for the PBoC to cut its one-year lending rate following a series of disappointing economic data and the trade war with the US. Chinese local finance media also cites multiple economists in China calling for a total of 2% RRR cut in 2019.

 

  • And some further good news Tuesday with monetary data out of China suggesting that policy easing may be starting to work with M2 growth coming in line with market expectations at 8.0%YoY in November, new RMB loans recovering, and new TSF doubling to 1.52tn in November. Citi analysts expect that the targeted credit extension to private firms and SMEs could continue.

 

 

 

This is an extract from the Daily Currency Update, dated 12th December 2018. 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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