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Grounds for a Sustained USD Rally Still Missing

  • The US dollar enjoyed a broad based rally after the Republican-controlled House passed the 2018 budget resolution, a first crucial step towards US tax reform. However, hurdles remain with the House and Senate having to reconcile for the final budget to be voted upon. Ahead of that comes the US September jobs report tonight. The GBP was hurt by the rising political woes in the UK and weak retail sales in Australia weighed on the AUD.

 

  • Minutes from the European Central Bank’s (ECB) latest meeting had little impact on the EUR.

 

  • The sterling was hurt by media reports suggesting that Prime Minister May could face calls to quit following her speech this week, possibly by Christmas. Citi analysts think this is unlikely but the speculation is unlikely to dissipate, potentially weighing on the sterling.

 

USD: Tactical rebound may continue but too early to call for a sustained rally

  • Investors await tonight’s US September jobs report where average hourly earnings (AHE) will be key for the US dollar. Citi analysts average hourly earnings to grow 0.3% month over month or 2.6% year over year, but see more upside than downside risks. While this may cause a further uptick in the USD, a broad based and sustained USD rally would likely require the delivery of a credible tax reform plan by the Trump administration that meets bi-partisan support. More concrete signs of inflation picking up in the US would also be needed to raise prospects of 3 Fed rate hikes in 2018 and support the dollar.

 

EUR & GBP: ECB Minutes downgrade EUR strength concerns, sterling under pressure from political woes

  • With ECB’s forward guidance downgrading concerns about recent EUR strength, EUR appears to be finding more support at the lower levels despite the modest sell-off. A further tactical decline is possible should the US jobs report post come in strong but investors should be mindful of the continuing strengthening in euro zone data seen this week.

 

  • More negatives for sterling overnight due to press reports suggesting PM May could face calls to quit following her speech this week, possibly by Christmas. GBPUSD drops almost 150 pips (and currently remains near lows at 1.3100). This comes even as BoE’s McCafferty repeats his hawkish mantra overnight and Citi analysts make a BoE 25bp hike in November their base case. But with UK rates markets now largely discounting such a move, political developments in the UK are more likely to be the driver of sterling sentiment, particularly versus EUR.

 

 

Commodity Bloc: AUD hit by sharply weaker retail sales data

  • Australian retail trade’s worst start to a quarter since the GFC - Retail sales fall -0.6% in August following a revised 0.2% fall in July with weakness spread across most categories and spread out across the nation. Citi analysts think that unless there is an unexpectedly large rebound in September retail trade, real Q3 retail sales could be negative and the yearly growth rate slower at 2.0% - not an environment in which the RBA would likely contemplate near to medium-term rate hikes.  

 

 

Asia EM: PBoC cuts the RRR, Singapore’s MAS likely to keep policy unchanged

  • Market Implications of the Targeted RRR Cut by the PBoC - The new targeted RRR cut is likely to see China’s bond and rate markets rally modestly after the Golden Week holidays this week and supported by the moderating economic momentum in China. This could pressure RMB (albeit modestly) as yield differentials drive FX conversion.

 

  • The Monetary Authority of Singapore (MAS) may likely announce its Monetary Policy Statement on 13 October. Citi analysts foresee no change in the policy (65% probability). However, MAS’s increased confidence over the broadening recovery into domestic demand – alongside lower-than-expected job market slack – suggests a less dovish tilt in assessing risks to its inflation outlook. This could pave the way for normalization in 2018, even if the “extended period” language is retained.

 

This is an extract from the Daily Currency Update, dated 6th October. Please speak to a Citigold Relationship Manager for more information

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