-->Is overnight price action starting to signal an end to USD’s recent gains? EUR sentiment neutral for now on Coronavirus concerns
- USD: The broad based USD Index (DXY) trades heavy overnight in profit taking from recent gains even as US data is supportive. For the record – (1) The US NFIB survey is off to a strong star for the small business economy, “with owners expecting increased sales, earnings, and higher wages for employees,” says NFIB Chief Economist William Dunkelberg. “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.” (2) Fed Chair Powell delivers a on hold, “wait and see” message on risks from the Coronavirus. In the Q&A, Powell says the FOMC would only react to Coronavirus should it be seen as having a persistent negative effect on US growth – echoing comments from other Fed officials. Powell estimates the Coronavirus will exert only slight drag on US Q1 GDP growth – through reduced tourism and exports. However, there is a risk that shuttered factories lead to more significant effects on global supply chains and manufacturing, which are much harder to estimate for now.
- USD: CPI Preview (data due tonight) – Citi analysts expect US January CPI to support core PCE returning to 2% and see a solid 0.21%MoM increase in January, with moderate increases in components of underlying inflation but with relatively more strength in transitory factors. The data though is unlikely to be strong enough to price out expectations of Fed cuts this year (US rates currently price slightly more than 40bp of cuts before year-end), given that risks remain tilted to the downside on coronavirus concerns – such sentiment is likely to cap any post CPI rally in USD.
- EUR: Some evidence of stabilization in euro sentiment overnight as markets await ECB President Lagarde’s introductory statement at the European Parliament today at 09:00 EST in a presentation of the ECB annual report for 2018 where markets remain sensitive to any ECB Strategic Review hints on monetary policy. Other ECB-speakers may echo this - New Executive Board member Isabel Schnabel speaks at 11:30 EST in a speech titled "Narratives on the ECB's Monetary Policy: Reality or Fiction? And ECB chief economist Lane rounds off the day in a speech in Berlin at a financial markets conference. EUR Outlook – Euro zone front end rates now price roughly a 50% chance of a further ECB rate cut by year end on fears that the EU-China supply chain will likely take a hit from the Coronavirus outbreak. As a result, investors are currently adopting a more cautious but neutral stance on euro for now.
GBP: Time to be more cautious ahead of buy levels at 1.2770
- GBP: UK Q4 growth subdued, Q1 rebound still expected - UK GDP stagnates in Q4, with growth of 0.0% compared to 0.5% in Q3 (Citi 0.0%, Consensus 0.0%, BoE 0.0%). That rounds out a year of volatile quarterly UK GDP growth with UK GDP rising 1.4% overall in 2019. Services and private consumption are concerns — with both slowing in Q4 while production is also subdued with weakness in manufacturing relatively widespread compared to previous quarters. Investment also declines with manufacturing investment weak (-3.9% QQ) but UK exports are robust — growth is strong in Q4 at 4.1% QQ and follows 7.9% QQ growth in Q3. "Boris bounce" — Citi analysts still expect a rebound in Q1 2020 as forestalled investment, hiring and consumption plans are realized following the Conservatives’ decisive election victory. The rebound in services and construction output in December also points to resilience in the UK economy moving into Q1 while the weakness in investment in Q4 may be the springboard for a rebound in Q1-2020.
- GBP: Brexit developments - UK Chancellor Sajid Javid in a piece in City A.M overnight, says that the UK will seek to diverge from EU regulations but aim for an equivalence-based agreement for financial services. He is hoping for some form of permanent equivalence but the EU is unlikely to agree to this without further assurances. PM Boris Johnson will also carry out a cabinet reshuffle on Thursday, confirmed by his spokesperson. GBP Outlook – As with the euro, sterling investors now wait to see if hard data (UK GDP) mirrors the uptick seen in UK soft data (these prints will not emerge for a few weeks so sterling might struggle to rally in the short term).
Commodity Bloc: Australian business confidence improves
- AUD: Australia’s January NAB business confidence improves to -0.8% from -2.5% in December though the business conditions index is almost flat at around 3%. Overall, Australian indicators are now starting to price in a cyclical recovery and with the bar to further RBA easing higher (looking through the short term impact of bushfires ), this should see more resilience from AUD at current levels.
- NZD: RBNZ Monetary Policy Meeting: Citi forecast; 1.00%, Previous; 1.00% - RBNZ is expected to leave the OCR unchanged at 1% in the February MPC meeting today and Citi analysts expect the Bank will remain on hold this year. A risk to the Citi analyst view is that a drop in tourism from the coronavirus could weigh on Q1 growth, which could lead to downward revisions.
- CAD: This week sees a panel presentation by Governor Poloz that could be one of the last times we hear from the BoC before the March meeting. Canadian January home sales data should show a continued rise in home prices.
Asia EM: This week in China
- In China, the Wuhan virus remains in focus, with growth concerns looming. Data wise, Citi analysts expect YoY growth of China’s M2 to rise by 0.1ppt to 8.8%YoY in January and M1 to grow at 5%YoY in January. New RMB loans (Citi: RMB3,000bn) and TSF data (Citi: RMB4,000bn) may accelerate in January. Citi analysts also expect financial institutions to cut 1-year Loan Prime Rate (LPR) by 10bps to 4.05% to lower firms’ funding costs.
This is an extract from the Daily Currency Update, dated February 12, 2020. Please approach a Citigold Relationship Manager if you would like more information.