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Modest reversal to Safe Haven demand on reports US – China deal may be close; USD trades heavy ahead of jobs report; Citi’s sterling optimism

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Modest reversal to Safe Haven demand on reports US – China deal may be close; USD trades heavy ahead of jobs report; Citi’s sterling optimism                                

  • Safe Havens (JPY, CHF & Gold): USDJPY trades back up between 108.50-109 and RMB gains, taking back the 2 big figures loss from Wednesday as a Bloomberg report overnight suggests trade negotiators are moving towards a “phase one” trade deal despite recent heated rhetoric. This runs counter to comments made by President Trump and Commerce Secretary Ross the day before suggesting China tariffs due on December 15 may go ahead as a trade deal could be delayed to 2020. The Bloomberg comments overnight also suggest the US House of Representatives bill in support of Uighurs in China’s Xinjiang region is unlikely to derail the US – China trade talks.     
  • USD: Meanwhile, USD continues to trade heavy on weaker US data with ADP missing at +67k versus 135k expected (though not enough to change the Citi analysts call for November jobs at +183k – due tomorrow) and ISM November non-manufacturing drifting lower to 53.9 from 54.7 in October and also below consensus at 54.5. New orders rise to 57.1 from 55.6 but business activity declines substantially to 51.6 from 57.0, indicating weakness in manufacturing may be spilling over into services to a larger extent than previously thought.     
  • USD: Investors await tomorrow’s US November non-farm payrolls report. Citi analysts expect 183k jobs added, reflecting a still-solid underlying pace of job growth and a boost from striking autoworkers returning to company payrolls. Citi analysts also expect a solid 0.3%MoM (3.1%YoY) rise in average hourly earnings, supporting aggregate incomes and consumption as the key driver of growth into 2020. That said, risks are likely tilted to the downside. And with the Fed signaling its on-hold stance will only change on a “material reassessment” of the outlook, a few weaker-than-expected hard data print would likely come close to meeting the bar for “material reassessment.” Note that currently, US rates price a 70% chance of only one more 25bp Fed rate cut in 6 months time. 
  • GBP: The investor buy-the-dip strategy continues in cable into UK elections (due December 12th) as current odds suggest the most likely election outcomes as ultimately GBP positive - either a Conservative majority, the market base case, or a Labor-led coalition. Citi analysts also turn more positive on sterling citing the underinvestment in the unit due to Brexit uncertainty. Ultimately the team thinks a Tory majority will likely lead to a bounce in market sentiment and possible fiscal ease from the newly formed government (notwithstanding election promises to remain fiscally prudent).                

 

EUR: A firmer floor as euro zone data looks to be bottoming                                    

  • EUR: Continues to hold its recent gains thanks to (1) euro zone industrial production likely bottoming, (2) German fiscal easing speculation, (3) weaker US data resulting in a lower USD, and (4) stronger Chinese PMIs released over the weekend and Monday. Investors await euro zone GDP (Friday), 3Q 2nd Estimate (Citi forecast: 0.2%, QQ, 1.2% YY, Prior: 0.2% QQ, 1.2% YY) - the latest survey data and Citi analysts’ bean-count models suggest a recession should be avoided amid signs of improving economic sentiment, particularly within manufacturing after a trough in late summer.   

 

Commodity Bloc: Optimistic BoC sees no need to lower rates; Australia Q3 GDP slightly weaker than expected  

  • CAD: BoC judges it “appropriate to maintain the current level of the overnight target rate” at its December meeting. Guidance is little changed from October but the policy statement has a slightly more optimistic (hawkish) lean citing resilient consumption and housing activity in Canada with inflation expected to stay around target. Citi analysts base case remains for the BoC on hold throughout 2020. Canadian rates markets however continue to price 10bp of rate cuts by mid-2020.
  • AUD: Australia Q3 GDP is weaker than expected at 0.4% vs 0.5% expected but with Q2 revised higher to 0.6% from 0.5%p. ABS notes “household sector remains relatively subdued and the miss also reflects RBA’s continued concerns about weak wage growth and effect on consumption in Australia, including the downside risk this poses to the economy going forward
  • NZD: Rallies modestly as RBNZ bank capital announcement comes largely as expected with key points as follows (1) RBNZ raises bank capital levels as planned, extends transition; (2) Gives banks 7 years to increase capital buffers; (3) Total capital to rise 18% for big banks, 16% for small banks.      

 

Citi analysts cautiously optimistic on China outlook even if there is no US – China trade deal by year-end            

  • CNH: Yuan strengthens overnight, taking back the 2 big figures loss from Wednesday as a Bloomberg report suggests trade negotiators are moving towards a “phase one” trade deal despite recent heated rhetoric. This runs counter to comments made by President Trump and Commerce Secretary Ross suggesting China tariffs due to be implemented on December 15 may go ahead as a deal could be delayed to 2020. Given the contradictory statements/ reports over the past 48 hours, risks appear symmetric around a “phase one” deal and include – (1) not meeting the December 15th deadline – US raises tariffs and risk aversion likely spikes and encourages a bid for safe havens (JPY, CHF and Gold); OR (2) “phase one” is signed off with US possibly announcing intentions to roll back some existing tariffs as opposed to merely delaying new tariffs – likely sees a positive risk response with some (modest) unloading of safe haven currencies.   
  • CNH: Citi analysts however are more positive on China, saying no matter whether there is a “phase one” deal or not, the direct effect of the tariff war will likely peak in coming quarters. This is because policy push for domestic investment has stepped up further, and the impact will likely show up in the data ahead. Overall, Citi analysts maintain China’s growth forecast at 6.1%YoY for Q4 vs. 6.0%YoY in Q3  

 

This is an extract from the Daily Currency Update, dated December 5, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

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