Markets interpret BoE’s Carney’s headline remarks as dovish for GBP; USD focus shifts to US jobs; Safe havens to remain structurally bid

Markets interpret BoE’s Carney’s headline remarks as dovish for GBP;  USD focus shifts to US jobs; Safe havens to remain structurally bid    

• GBP: BoE Governor Carney’s headline remarks overnight are seen as dovish and send GBPUSD lower. Key highlights of his speech – (1) BOE has the equivalent of 250bp of policy space; (2) the MPC is debating merits of near term stimulus; (3) The UK economy has been sluggish, slack has been growing, and inflation is below target. Much hinges on the speed with which domestic confidence returns…..in coming weeks, the MPC will watch closely surveys of business and consumer confidence (including intelligence from our Agents) as well as global developments and will also undertake our annual supply stock take.         

• USD: Shows some further (though smaller) gains overnight with the broad based USD Index (DXY) up slightly at 97.40 and USDJPY up near H2’2019 highs at 109.5. The gains come as Fed speaker Clarida speaks on USD funding, noting that ‘some repo’ operations might be needed throughout April when reserves will likely be markedly reduced by corporate tax drawdowns (pointing to potentially more demand for USD liquidity). That said, the fact this is now mentioned means this is on the Fed’s radar as it looks to possible solutions to alleviate USD supply constraints.          

• USD: There are no less than six Fed speakers tonight with Governor Clarida once again speaking but this time on the outlook for the US economy and monetary policy; Kashkari then Williams on the future of inflation targeting; Barkin then Evans on the economic outlook and finally James Bullard. Data wise tonight, Citi analysts expect December nonfarm payrolls at 175k with the unemployment rate at 3.5% and hourly earnings growth at 0.2%MM (3.0%YoY) - points to annual job growth averaging ~185k jobs/month for the last 6 months.           

• Safe Haven (JPY & Gold): The recent Japanese fiscal stimulus package (supplementary budget approved on December 13 plus the FY2020 budget approved on December 20) has helped to alleviate fears that the consumption tax will weigh on the local economy. As a result, the Yen rates market has priced out a BoJ rate cut, likely removing a key impediment towards a stronger JPY. Also note that BoJ Governor Kuroda and PM Abe are campaigning for wage hikes during upcoming spring negotiations, making further BoJ accommodation much less likely. On Gold, Citi analysts maintain their medium term conviction bullish conviction notwithstanding the recent de-escalation in Mideast tensions.           

EUR: Mixed German data still points to possible turning point            

• EUR: Germany’s November trade balance (data released overnight) comes in somewhat weak, with exports declining -2.3%MoM vs -0.9% forecast but industrial production improves, up 1.1%MoM in November vs 0.8% forecast. This is in contrast to German November factory orders released earlier this week that surprises to the downside at -1.3%MoM vs 0.2% expected though the October print is revised up to +0.2%MoM vs initial -0.4% print. Bottom line - mixed German data points to a possible bottoming of last year’s downturn though a significant pickup in activity is yet to be seen.      

GBP: BoE Governor Carney mentions possible stimulus but the context is important  

• GBP: While markets interpret Governor Carney’s comments overnight to be dovish (refer PP1), the full remarks are not nearly as negative given there were 2 dissenters at the December BoE meeting that voted to cut rates against the majority “on hold”, suggesting the comments are the start of a debate on near-term stimulus that was already highly likely. Crucially the 250bps of policy space is a combination of both “conventional and unconventional policy. Bottom Line - preliminary UK PMI data will be a key input into the January 30 BoE meeting as will speeches from MPC members Tenreyro and Saunders.    

Commodity Bloc: Canada – BoC Governor Poloz upbeat yet again        

• Highlights of BoC Governor Poloz’s speech overnight – (1) Trade uncertainty - On the surface, there has been some improvement on this front lately, although it remains to be seen whether this will lead to a recovery of trade and investment. (2) Jobs - Our labor market has shown a healthy trend over the past year, wage growth has continued to strengthen. (3) Housing - Should this housing rebound continue, we will be watching for signs of extrapolative expectations returning to certain major housing markets—in other words, froth. (4) Markets - ….certainly, it seems that the potential downside risks have eased as the US and China approach a deal. (5) Canada’s growth outlook – Q3 national accounts data showed unexpectedly strong growth in business investment. Poloz is also quite dismissive of recent data misses citing strikes and bad weather as potential drivers. Markets await Canada’s December jobs data tonight where Citi analysts expect a strong bounce-back but with y-o-y wage growth moderating.    

Asia EM: China’s December / Q4 data preview (due today and next week) – likely pointing to signs of stabilization 

• CNH: This and next week sees Chinese data in the form of CPI inflation (Citi analysts expect 4.7%YoY in December, and PPI deflation to also narrow to -0.2%YoY). China’s FAI growth may edge up to 5.4%YoY YTD in December and Citi analysts expect YoY Chinese M2 to rise 0.1ppt to 8.3%YoY in December from a month ago and M1 growth to advance slightly to 3.7%YoY in December from 3.5%YoY in November. Chinese new RMB loans and TSF data may moderate in December from a month ago but still likely keep robust pace of expansion – Citi analysts expect new RMB loan to fall to around RMB 1.0trn in December from RMB1.39trn in November due to seasonal patterns. Finally, Citi analysts maintain their China GDP growth forecast at 6.1%YoY for Q4 and 6.2%YoY for 2019E as growth shows increasingly greater signs of stabilization. In particular, manufacturing PMI has returned to expansion after contracting for six months and US-China trade tensions have also eased. 

This is an extract from the Daily Currency Update, dated January 10, 2020. Please approach a Citigold Relationship Manager if you would like more information.