No respite for euro despite strong German exports
- Strong German exports limit Q4 GDP downside – In data released Friday, German goods exports rise 1.5% MM in December (consensus 0.4), outperforming imports, up 1.2% MM (consensus 0.5). In 4Q as a whole, exports are up 1.0% QQ, while imports are nearly flat (-0.1% QQ), pointing to a positive contribution from net trade. However, little respite for EUR as it continues to reel from the shock of last week’s EU downgrade to Italian and German growth for 2019 (to 0.2% and 1.0% respectively) that also sends Italian bond yields sharply higher and German Bund yields lower to sub 0.1%, widening the yield differential with US.
Strong Canadian employment encouraging for wage growth and CAD
- Canadian employment rises a strong 66.8k in January, much higher than consensus expectations at 5.0k and Citi at 13.0k and with hourly wages also rising more than expected to 1.8%YoY, higher than Citi and consensus expectations for a 1.6%YoY increase, the center of attention for the BoC (as in deputy Boc Governor Wilkins’s remarks last week) as a sign of labor market tightness. The data leaves Citi analysts expecting further BoC rate hikes this cycle and current market pricing of just 5bp in 2019 looks low – rates remain supportive for CAD.
Trade tension jitters and concerns over global growth overwhelm risk positive backdrop from dovish Fed
- In a sign of increasing market jitters about the US – China trade outcome as it approaches the March 1 deadline, comments by President Trump late last week confirming he is unlikely to meet his Chinese counterpart Xi before the deadline sees investors switching to a risk-off mode. Add investor concerns over global growth (Europe and China) and the negative sentiment appears to be overwhelming the positive risk tone from robust US growth and a “patient” Fed, leading equity prices and Treasury yields to decline but tactically supporting USD.
- The week in the US, Citi analysts expect the US legislature will most likely come to an agreement to avert another partial shutdown. More importantly, attention will be on US officials travelling to China to resume trade talks (14-15 Feb). Equally important is the Section 232 report on auto imports due on 17 February where tariffs may be recommended but Japan and Europe could be exempted. Data wise, Citi analysts expect core CPI up 0.2%MM (consensus 0.2%) and PPI Final Demand at 0.0%MM (consensus 0.1%).
Brexit – Possible scenarios
- Latest developments on Brexit - no new official proposals for the backstop and no progress towards a re-negotiation with the EU over the weekend, but the UK government is scheduled to table an amendable Brexit motion this week where MPs could give PM May more time to take negotiations to the brink. Possible scenarios now include – (1) EU could offer a time-limited Irish backstop in the non-legally binding EU – UK future deceleration (and not in the legally binding Withdrawal Agreement); (2) If that doesn't look as though it will be enough for Brexit hardliners, then she could adopt the opposition Labor Party Corbyn's customs union pledge in the (non-binding) future declaration. Enough Brexit hardliners (the ERG group) have suggested they'd be ok with this; (3) In all likelihood however, a UK parliament vote on PM May’s deal is now unlikely to take place on February 13/14 – most likely now delayed to the end of February. Ready for No Deal? – A “no deal” Brexit remains the default scenario but low risk for now. Citi analysts expect a “no-deal” to generate significant economic harm on both sides.
US Commerce Department report on auto imports to be watched closely re: impact on Germany
- The week ahead in Europe sees euro zone December industrial production (Citi at -0.3 %MM, consensus -0.4%), German Q4 GDP (Citi at -0.1%QQ, consensus +0.1%), and UK core CPI inflation (Citi at 1.9%, consensus 1.9%). Most attention however will focus on the US Department of Commerce report on auto imports by February 17th that could fuel speculation over renewed intensification of trade tensions with Europe. The report may not be made public until some days later and the US President has 90-days to make a decision after receiving the recommendation. Citi analysts think the report may recommend some restrictions on auto and auto parts imports, but there is likelihood that the EU and Japan may be exempted from any potential tariffs so the bark on the report may be worse than the bite. Nevertheless, nervousness about its findings is likely to weigh on the euro.
Week Ahead – RBNZ board meeting likely to move to neutral but unlikely to validate rate cuts
- The RBNZ statement this week is likely to place more emphasis on the downside risks to the rates outlook, consistent with the line taken by the RBA, BoE and ECB recently. This would also reflect changes to growth risks in major trading partners and the likelihood of downward revision to key domestic macroeconomic variables. What should stop an explicit statement of monetary easing however is the maintenance of maximum sustainable employment and improvement in business sentiment.
Timing the China Easing Impact
- Citi analysts note statistical evidence that suggests Korean data leads Chinese data momentum by around 12/13 weeks (or ~3 months) and find the recent uptick in Korean data momentum back into positive territory could suggest that Chinese data momentum does take a meaningful change in direction before Q2 this year. Interestingly, Korea is a leading indicator for both China and Euro area data.
This is an extract from the Daily Currency Update, dated 11th February 2019. Please approach a Citigold Relationship Manager if you would like more information