Mixed Picture for USD

Geopolitical Tensions Present a Mixed Picture for USD              

• Political developments in  US on Friday present a mixed picture for USD. These include (1)  market fears of a collapse in the US – China truce as a major Chinese telco’s CFO is formally charged in Canada with breaking Iran sanctions. (2) confusion about the Trump – Xi meeting as Trump economic advisor Kudlow paints a fairly optimistic picture while US trade representative Navarro is less keen. (3) rising tensions within the White House as Chief of Staff Kelly steps down and Special Prosecutor Mueller’s investigations starts to approach the worst case scenarios.

• Negatives for USD also include more dovish Fed speak from Fed Governor Brainard and a WSJ article saying "Fed officials are considering whether to signal in December a new wait-and-see approach that could slow the pace of rate increases...". The US November jobs report also sees headline NFP miss expectations by nearly 50k (+155k) but with the unemployment rate steady at 3.7% and average hourly earnings unchanged at 3.1%YoY. Citi analysts still see strong US growth as the reason for the Fed to raise rates in December and further into 2019.

EUR & GBP: Attention turns to this week’s ECB meeting, Italy budget talks and UK Parliament’s Brexit “Meaningful Vote”

• The ECB meeting this week is likely to confirm an end to QE by month-end with staff projections (on euro zone growth and inflation) likely be in line with the ECB’s medium-term price stability mandate. What about the forward guidance and the reinvestment policy? — Citi analysts are not expecting very much to be said on either issue, given the fairly wide range of plausible outcomes on a one-year horizon. Over 2019, Citi analysts believe that current market pricing for ECB rate hikes in 2019 is conservative at less than 7bp with a base case for a hike of 15-20bp.

• In Italy, speculation is that Italian Finance Minister Tria could step down, amid signs of continued tensions. Meanwhile on the budget, the government has called for a confidence vote in the lower house expected to take place late Friday. Confidence votes are often used in Italy to ensure legislation is passed. The budget would then go to the Senate, where it is likely to be amended, and then back to the lower house for final approval. Italy’s government hopes to send a revised budget to EU on Wednesday according to a Reuters source.

• On Brexit, the UK parliament’s “Meaningful vote” is expected to proceed on Tuesday. 320 is the crucial threshold to get the deal over the line, though unlikely as PM May’s Withdrawal Bill is expected to be defeated. However, should the defeat be by less than 70 votes, then sterling may gain on expectations the Bill could pass the second time around. Citi’s base case is also that  Tuesday’s “Meaningful Vote” is likely to fail by a slim margin before passing at a later vote.

Commodity bloc: CAD outperforms amid strong jobs and OPEC’s higher than expected output cut; Citi analysts push back RBA/ BoC rate call                                      

• USDCAD ends up lower on Friday closer to 1.3300 as oil prices rebound following OPEC and Russia’s decision to target higher oil production cuts of 1.2mn bpd (against consensus expectations for 1mn) with conditions to determine if further adjustments are needed. Citi’s base case remains to see prices largely range $55-65 through 2019.

• Canadian employment gains by 94.1k in November, led by a 89.9k gain in full time jobs. This is the largest gain on record going back to 1976 and also sees the unemployment rate unexpectedly dropping to 5.6% though wage growth misses forecasts of 1.8%YoY, growing just 1.5%, slowest since July 2017. Citi analysts expect the BoC to raise rates 3 times next year though delay the first hike to April (from January) with risks titled towards an earlier pause by the BoC.

• Citi analysts also push back their RBA rate call to mid 2020 from end – 2019, driven by slower than expected economic growth with the likelihood of ongoing soft consumer spending and a protracted housing market correction.

This is an extract from the Daily Currency Update, dated 10th December 2018. Please approach a Citigold Relationship Manager if you would like more information.