FX
Resilience in USD is unlikely to last
Posted on-->Resilience in USD is unlikely to last (especially once the current fog over the status of the US – China phase one deal lifts and sees a sign-off followed by a rollback of tariffs).
- USD: Resilience in USD is unlikely to last (especially once the current fog over the status of the US – China phase one deal lifts and sees a sign-off followed by a rollback of tariffs). Citi analysts believe that “Investors are used to strong $/risk off, but in the past there are many examples of risk aversion with a weak $. Current low G7-FX volatility could rise sharply if $ weakness exposes structural long $ positions such as the near EUR2trn EA $ fixed income exposure built up since 2015”.Citi analysts also point to the confirmation of the strong monthly reversal in DXY after having closed well below 97.86 at month-end last week (97.24) and EURUSD closing above 1.1109. With DXY now having seen a bullish monthly reversal, Citi analysts believes that USD is increasingly looking to turn lower.
- JPY: USDJPY sees resistance around 109.30 (August highs) after having broken through the 200d MA at 109.04 overnight. Citi analysts point to Japanese life insurance companies having recently announced their investment policies for FY2019 H2 with some planning to reduce investment in FX-hedged bonds, others saying they will increase investment in unhedged foreign bonds but many more announcing they plan to increase investment in domestic bonds and equities more proactively than they have in the last few years. As a result, Citi analysts see any selloff off in JPY being contained unless JPY appreciates to around 100, the top end of its expected range.
- Safe havens (JPY & Gold): Tariff roll-back on the way followed by trade optimism being walked back- Risk sentiment has a mixed day overnight triggered by changes in trade headlines. Risk-on is initially triggered by optimism about US-China trade with US sources seeming to confirm that phase one of a trade deal could see both sides roll back tariffs in phases. However, reports from Reuters and Fox Business caused the optimism to fade on reports that “China wants all tariffs rolled back as phases of the trade deals are completed while the US offers to roll back some tariffs” while Reuters indicates the tariff roll-backs are receiving fierce opposition inside the White House as they are not considered part of the verbal deal announced by President Trump. Further complications include a yet still no location announced for the signing of the phase one US – China deal while China says that the amount of tariff relief in phase one would depend on content.
EUR & GBP: German industrial production falls; BoE tilting towards a rate cut?
- EUR: German industrial production falls 0.6% MM in September (Consensus -0.4, Citi +0.4), more than reversing the 0.4% MM gain in August (which is revised up from 0.3% MM). Manufacturing output drops 1.3% MM and Q3 production at 1.1% QQ is lower than in 2Q, the fifth successive drop in output. Citi analysts expect German GDP to have declined by 0.1% QQ in 3Q. That would be the second successive quarter of decline and thus mean the first recession since the European debt crisis.
- GBP: The BoE MPC keeps the Bank Rate at 0.75% and guidance towards rate hikes but surprises with a dovish 7-2 vote split, a short-term rate cut bias and a new Brexit assumption. However, the outlook could change with the election and resulting new Brexit and fiscal policies.
- GBP: New short-term rate cut bias – The MPC says in the near-term, monetary policy may need to reinforce the expected recovery “if global growth fails to materialize or if Brexit uncertainties remain entrenched”…..but long-term rate hike bias continues – The forecasts call for and the BoE maintains its guidance that if the economy develops as expected, “some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at target” (Citi analysts currently target one 25bp hike per year from 2021).
- GBP: Watch fiscal after election – Timing could vary, but Citi analysts expect the BoE to hike next if voters deliver a decisive majority (either way) on 12 December, due to a clearer Brexit path and more fiscal easing than the BoE forecasts. On the other hand, a rate cut would be likely if no coherent majority emerges. Bottom Line - As things stand, PM Johnson leads the national polls with a double digit lead, making it his (and by extension, GBP optimism) to lose in the next five weeks. Polling puts the Conservatives on track for a significant majority of the vote at this stage.
Commodity Bloc: Australian trade data underpins moderate outperformance
- AUD: Trades up above 0.6900 on solid trade data before retreating modestly on mixed US – China trade news. Citi analysts report that the Australian September nominal trade surplus of AUD7.2bn is much higher than the expected AUD5.0bn and Citi’s AUD5.4bn forecast. The positive surprise is reinforced by an upgrade to the August surplus, from AUD5.9bn to AUD6.6bn. Higher commodity prices, non-monetary gold exports and seasonal adjustment largely explain the better that expected September data. Markets now await the RBA’s outlook for the external sector in today’s release of the November Statement on Monetary Policy.
- CAD: Following two months of strong Canadian jobs growth, election-related hiring could help support October job gains. Wages should continue to rise at a strong +4% pace.
Asia FX: Long CNH
- Looking ahead, Citi analysts remain mildly constructive on trade prospects for the short-term. Citi analysts believe that potential September tariff rollback opens the door for more bullish price action, widening China-US rate differentials provide a buffer for short USDCNH and fixed-income market inflows riding on index inclusion could support the RMB.
This is an extract from the Daily Currency Update, dated November 8, 2019. Please approach a Citigold Relationship Manager if you would like more information.