RBA Steps Back to a More Neutral Bias
The RBA statement on Tuesday leans less dovish, associating downside risks with the global backdrop and deeming the domestic outlook as "reasonable”. However, investors take note of Governor Lowe’s comments in which he moves guidance to a more neutral stance on rates amid expectations for lower GDP and inflation forecasts for Australia (to be confirmed in Friday’s MPS). Governor Lowe’s key statement - “Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced. In the event of a sustained increase “In the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. We have the flexibility to do this if needed.”.
USD: Further near term gains but upside firmly capped
USD Index (DXY) recovers almost all its late January losses this week though with much of this strength driven by weakness elsewhere (further EUR declines following weak euro zone data and dovish ECB speculation; GBP weakness amid heightened Brexit uncertainty; AUD weakness following RBA Governor’s move to a neutral bias). Stronger US data helps (ISM services and payrolls) but a further bout of USD gains likely notwithstanding in the short term, the dovish removal of the Fed’s forward guidance on rates in the January FOMC meeting amidst the backdrop of continuing strength in the US economy likely supports a risk rally (including in FX) over time against USD.
EUR & GBP: Euro zone PMIs stable but German factory orders drop; Brexit preparations hit UK PMI
Upward revisions see the domestic-oriented Eurozone services PMI for January unchanged from December at 51.2 and versus 50.8 flash estimate and the composite euro zone PMI is also nearly stable, edging down by mere 0.1p (instead of the flash estimate of 0.4p) to 51.1 with the reading consistent with annualized euro zone GDP growth of around 0.5%, though well below the potential growth rate of around 1-1.5%. However, German factory orders for December slump -1.6% MM in December (consensus +0.3, Citi 0.0), highlighting a downturn that continues even after significant upward revisions of November data from -1.0% MM to -0.2% MM.
Sterling comes off sharply following the release of UK Services PMI for January that slips to 50.1 (vs. consensus for 51.0), representing a small fall from December's print of 51.2 but at the lowest since the Brexit vote. Survey respondents overwhelmingly link the slowdown in business activity growth to heightened Brexit uncertainty at the start of 2019. The big events of the week is PM May’s meeting with European officials in Brussels tonight to discuss new proposals on the Irish backstop. Latest developments include PM May indicating “a changed backstop is the key issue in the Brexit process” with the DUP also indicating they would be on board with changing the backstop rather than removing it entirely. On the topic of technology, PM May notes: "I understand what a hard border would mean... while technology can play a part and we will look at alternative arrangements these must work."
Commodity bloc: CAD awaits jobs data
CAD awaits Friday’s Canadian jobs report with Citi analysts expecting 13K jobs to be added in January. Market attention though is likely to be on the wage component of the employment report after comments from BoC Deputy Governor Wilkins suggesting the BoC will be monitoring wage growth as a gauge of the tightness of the labor market. Citi analysts continue to expect further BoC rate hikes this cycle, but a newly more-dovish Fed and early-2019 oil-related weakness imply little catalyst for the market to significantly re-price hikes in the very near term.
Asia EM: Citi analysts shift to a more neutral stance on Asia EM
Citi analysts highlight (1) the key catalyst for a US – China trade deal is now delayed to late February when Presidents Trump and Xi meet; (2) USDCNY mid-point fixing fails to break 6.70, indicating strong support near term; (3) Thin liquidity around Chinese New Year and potential change of corporate behavior post the new year holidays as favorable seasonality fades; (4) A still-weak Chinese growth outlook in 1Q and easing monetary policy bias by the PBoC.
This is an extract from the Daily Currency Update, dated 7th February 2019. Please approach a Citigold Relationship Manager if you would like more information