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Modest USD Rebound on Fed Comments

Modest USD Rebound on Fed Comments     

  • An address from Chair Powell overnight sees him reiterate that "there is no path; there is no plan" for interest rates this year with the Fed "waiting and watching." While this strengthens the case for a Fed pause in March (and is therefore potentially USD negative), his comments on the balance sheet earn more focus when he says he is not sure what the long-term balance sheet will be but it should be "substantially smaller than what it is now" and "nowhere near what it was before." Equities dip and USD rebounds as a knee jerk reaction to this comment but caution is warranted on reading too much into this remark as he may be merely trying to convey that balance sheet run off is to continue for now.


  • No movement on the US partial government shutdown with President Trump seen to be readying to call emergency measures to override the Democrats on the border wall. Such speculation comes from President Trump cancelling his planned Davos trip, just hours after he says he would go as long as the government shutdown isn’t still going. The cancellation possibly suggests one of two things: 1) the President expects the shutdown to continue or 2) he plans to call emergency measures to end it (and then battle in courts with members of Congress).



EUR & GBP: Further evidence of euro zone Q4’18 weakness; Countdown to the UK parliament Brexit vote on January 15th                                    

  • French industrial production falls by 1.3% in November (adding to a similar fall in German industrial output), driven by a plunge in manufacturing by 1.4%. Sentiment is not helped by an announcement by Ford Motor company that it intends to shut down plants in Europe (UK, France and Germany). The news stems partly from changing auto emission rules in Germany that seems to have halted auto production in Germany and now appears to be extending to France. Widely seen as a temporary weight on growth, the slump in the auto industry is yet to see itself working through the change in emission rules.


  • Following the successive defeat of PM May on (1) the amendment to the government financing bill and (2) the Grieve amendment, the UK parliament gets ready to vote (the so-called Meaningful Vote) on PM May’s Brexit Withdrawal Bill next week on January 15th. Should that vote fail, she would have only until Monday January 21 (i.e. 3 working days) to produce a plan B to present to parliament.


  • The EU has already given some assurances on the Irish backstop and PM May could seek more, should her deal fail to get through in the UK parliament vote next week to try for a 2nd vote by the end of January. Bottom Line - Citi analysts see "No Deal" risks as overpriced and the likelihood of the Withdrawal Deal eventually passing (even if not on the first attempt on January 15th) as underpriced. Passage would require some combination of Tory/DUP/Labor opponents to vote in favor of the deal (or at least abstain) that may only come in a later vote.


  • The key for sterling stability through all this is whether the UK parliament can effectively take control (should PM May’s deal fail next week) and move to block a “No Brexit” outcome. The introduction of the 2 bills (on which PM May has been defeated this week) suggests that it is moving in that direction.



Commodity bloc: Australia’s external sector resilience highlighted once again                                    

  • AUDUSD is well supported overnight as improved iron-ore exports highlights the resilience of Australia’s export sector, despite the current US – China tensions. This follows anecdotal data showing shipments from Australia’s Port Hedland rising to 45.8m metric tons in December from 39.4m in November, according to port authority data, providing a much needed offset to the current domestic weakness seen in the housing sector/ inflation.



Asia EM: China - Lower inflation raises likelihood of interest rate cut but unlikely to impact RMB                                    

  • China’s CPI inflation comes in at 1.9%YoY in December, lower than 2.2%YoY in November and market expectations (Citi / Consensus: 2.0% / 2.1%). On a sequential basis, CPI is flat from November vs a -0.3%MoM decline in November. Continued price weakness opens the door for possible interest rate cuts amid more cautious consumer spending amid rising job security concerns. The retreat of inflation, together with a dovish Fed, creates more room for the PBoC to cut benchmark interest rates though RMB is unlikely to be negatively impacted as US – China rate differentials remain fairly unchanged (dovish Fed/ dovish PBoC).



This is an extract from the Daily Currency Update, dated 11th January 2019. Please approach a Citigold Relationship Manager if you would like more information

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