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Further Escalation in US Political Tensions Add to Headwinds for USD

Further Escalation in US Political Tensions Add to Headwinds for USD       

  • Political tensions within the US to continue to escalate with President Trump expected to hold a meeting with US Senators on the partial government shutdown tonight, adding to the planned meeting between US VP Pence and Homeland Security Secretary Nielsen with Senate Republicans. Also note that various news agencies are now reporting Trump may not call for national emergency measures in his address to the nation in a few hours. This means no legal challenge from the House Democrats but equally, Trump will not divert funds from the Pentagon to build the border wall – this potentially suggests the shutdown is likely to extend and political tensions to escalate.

 

  • In a further unravelling of safe haven inflows into USD, US – China trade tensions de-escalate further as talks extend to Wednesday; Key highlights overnight include – (1) US – China negotiators narrow differences on trade though not yet ready to conclude a trade deal; (2) Cabinet level follow-up talks expected later in January; (3) Progress made on issues including purchases of US goods and services; (4) Trump said to want trade deal with China soon to boost markets; (5) US Commerce Secretary Wilbur Ross - There’s a very good chance that we’ll get a reasonable settlement that China can live with, that we can live with, and that addresses all the key issues (CNBC).

 

 

EUR & GBP: Data weakness limiting euro upside for now but medium term bullish; Brexit deal likely to pass even if not on 1st attempt                                    

  • More data weakness in the euro zone overnight as German industrial production for November falls - 1.9%MoM vs. +0.3MoM consensus and December euro zone economic confidence index headline falls to 107.3 vs 108.2 expected. However, one-off factors such as the drought in Rhine, more public holidays and a car industry yet to recover from German emission rule changes, all contribute to the decline.

 

  • Temporary euro zone data weakness notwithstanding, Citi analysts now turn more hawkish on ECB rates in H2’19 as (1) they do not see compelling evidence that the euro area is at risk of recession in H1’2019. (2) There now being clear evidence of euro area wages picking up and in the absence of a positive productivity shock, would lead to underlying price pressures picking up more meaningfully as firms pass on higher input costs. As a result, Citi analysts now see the bar to rate normalization is probably lower, partly also because of the arrival of new (and likely less dovish) board members.

 

  • Brexit developments overnight – (1) Confirmation the Meaningful Vote in UK parliament is set to go ahead on Tuesday. Expectations are it is likely to be defeated, but size of the rebellion against PM May could be relatively contained and which points to a likely successful vote on the 2nd (or 3rd) attempt, thanks to fresh assurances from the EU on the Irish backstop overnight (from Germany and Ireland) - Daily Mail and Guardian report an “exchange of letters” between EU and UK is now in the offing setting out some kind of deadline on negotiations for a future trade deal and therefore on the Irish backstop. (2) Getting rid of the ‘No Deal’ possibility, for good - FT reports that “Downing Street is considering accepting a cross-party Brexit amendment to the finance bill to put pressure on PM May to rule out a no deal Brexit by blocking changes to British tax law unless parliament approves such an outcome.”

 

 

Commodity bloc: Resilient commodity prices to support sentiment; BoC seen lowering growth/ CPI forecasts but likely to be cautiously optimistic                                    

  • Australia records a solid $AU1.93bn trade surplus in November 2018 well above the average in 2018 of $AU1.68bn and highlights solid external demand for Australian exports at a time of heightened global trade tensions. Citi analysts see Australia’s 2018 c/a deficit at $AU11.4bn or 2.4% of GDP, up slightly from last quarter’s 2.2% of GDP but well below the longer term average of over 4% of GDP.

 

  • This week’s BoC board meeting is the key event within the commodity bloc and is likely to see lower Canadian growth and inflation forecasts accompanied by some cautious optimism coming against the backdrop of Canadian rates now discounting just 8bp of BoC rate hikes in 2019. This compares to Citi's expectations for 2 – 3 hikes even if they are delayed (commencing in April) and more gradual.

 

 

 

This is an extract from the Daily Currency Update, dated 9th January 2019. Please approach a Citigold Relationship Manager if you would like more information

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