Italy Risks Continue to Weigh on Euro
- Italy concerns continue to weigh on EUR following the PMIs decline and the EU Commission’s (EC) poor forecasts overnight, saying its current budgetary proposals are likely to see its deficit exceeding 3% of GDP in 2020, well above the Italian government’s targets (2.4% and 2.1%, respectively for 2019 and 2020). In terms of growth, EC expects Italy’s 2019 GDP to grow just 1.2% (this is in stark contrast to the Italian government's own forecast of 1.5%). Rome has until November 13 to re-submit its tax and spending proposals while Citi analysts expect Brussels to open an Excessive Deficit Procedure, with November 21 as the most probable date, which may eventually involve fines and further confrontations with Italy.
FOMC a non-event as markets look to the Fed Minutes
- FOMC meeting overnight is a non-event but USD rebounds though primarily against EUR and JPY. The FOMC acknowledges “economic activity has been rising at a strong rate” but there are no new projections and no press conference. Citi expects a rate hike in December followed by two in 2019 (in March and June) but Citi analysts remain more interested in the FOMC Minutes (released November 29) that will likely reveal longer-term plans for monetary policy implementation and balance sheet reduction.
- Meanwhile, the new US political landscape presents a challenge to USD but currencies such as EUR and JPY also have their negatives (EUR – Italian risks; JPY – Fed/ BoJ policy differentials) and may well see markets differentiating the USD outlook with perhaps some further USD strength to run against its G3 counterparts (EUR, JPY) but weakening against Asia EM, commodity FX and GBP.
GBP: UK cabinet meeting on Brexit unlikely next week
- Reuters quotes a UK government source overnight saying it's unlikely that a UK cabinet meeting on Brexit will take place until next week. This isn’t news, and given that PM May has a trip to France planned and an incredibly busy weekend of Remembrance/Armistice services, is hardly surprising. Either way, a Brexit deal now looks within reach – though the timeline remains unpredictable. In the interim, markets await tonight’s UK Q3 GDP print where consensus expects growth to accelerate to 0.6%QoQ, notwithstanding the uncertainty surrounding Brexit.
Asia EM: China trade data - exports solid notwithstanding trade tensions with US; But capital controls possible should outflows worsen
- China October trade balance comes in at USD34bn (expected USD35.2bn). Exports are robust at 15.6% versus 11.7% expected and imports are also strong at 21.4% YoY versus 14.5% expected. Even so, Citi analysts believe “the one-way RMB depreciation expectation could intensify pressure of capital outflow, and the government will likely respond by tightening capital controls.”
This is an extract from the Daily Currency Update, dated 9th November 2018. Please approach a Citigold Relationship Manager if you would like more information.