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Revisiting the case for a structural allocation to Safe Havens as uncertainties mount; USD negative political risks underappreciated

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Revisiting the case for a structural allocation to Safe Havens as uncertainties mount; USD negative political risks underappreciated                                                

  • Safe Havens (JPY & Gold): JPY is the primary mover overnight, strengthening in the market’s reaction to China virus headlines. Key points on China's coronavirus – (1) Estimates are north of 300 cases spread across China, South Korea, Japan, Taiwan, Philippines, Thailand and now one in the US. A meeting is planned tonight for the WHO to determine if the virus constitutes a public health emergency. US risk is likely “low” for now but expectations are for a rise in patients. (2) Emphasis on the difference with SARS - the current virus seems to have a lower mortality rate and China’s response appears to be more proactive than to the SARS virus.            
  • Safe Havens (JPY & Gold): Nevertheless, the virus is yet a further reason to allocate to Safe Havens (JPY and Gold) as  the number of potential uncertainties/ tensions mount, including – (1) Continuing US – China trade tensions despite signing of the phase one deal; (2) Risks to US growth – base case is for US economy in 2020 to follow a soft landing scenario with no further Fed rate cuts – but US markets are not pricing much downside risks. (3) Rising US political risks (refer below) - move to impeach Trump, while may not remove him from office but could create significant hurdles to prevent the White House from delivering fiscal initiatives in a presidential election year should the US economy enter a deeper slowdown; (4) Geopolitical tensions – Mideast, HK/ North Korea (note the overnight announcement that Nth Korea is ending its freeze on nuclear and missile tests), Taiwan.  
  • USD: Rising US political risks – (1) US Senate starts its impeachment trial overnight with Politico noting “there is virtually no chance that 67 senators will vote to remove Trump from office, but inside both parties are key blocs of senators who will ultimately decide whether Trump gets the speedy acquittal he has publicly demanded.” Comment – while President Trump is likely to retain office following the conclusion of the Senate trial, the political atmosphere is increasingly toxic (between the White House and the Democrat – held House) leading up to the US presidential elections in November. (2) Sanders risk underpriced - Markets remain complacent on the rising probability of Bernie Sanders winning early states – particularly Iowa – in the Democrat primaries and gaining momentum thereafter into Super Tuesday (March 3). Current indications show polls reflecting this, but markets have not yet reacted. Increasing probability of a Sanders nomination from the Democrats side is a likely risk and potentially USD negative.                       

 

EUR: Positive euro developments overnight ignored for now as attention turns to China virus                

  • EUR: Good progress on digital tax conversation between US and France; German optimism gathers pace – (1) French president Macron – “We will work together on a good agreement to avoid tariff escalation”. Finance Minister Maire – “We are ready to take steps toward the US….we hope to reach an agreement by Wednesday”. (2) Headline German ZEW investor expectations sharply exceeds expectations in January, rising from 10.7 in December to 26.7, the highest reading since 2015. Current assessment (proxy for the output gap) also jumps nearly 10 points to -9.5, the highest since July 2019. Bottom Line - Investors now see Germany firmly in the recovery quadrant.  
  • EUR: Attention now turns to the ECB meeting tomorrow and PMI data Friday - Citi analysts do not expect the meeting to be market-moving. ECB is likely to sound fairly optimistic, yet without near-term policy consequences. The upcoming strategic review will be a major focus in which the ECB is likely to announce it will be wide-ranging, covering the inflation objective, tools and communication. Equally important are releases of German manufacturing PMI (Citi analysts expect a pick up to 44.5 from 43.7) and euro zone manufacturing PMI (Citi analysts expect a pick up to 47.4 from 46.3). 

 

GBP: UK headline employment resilient in 3 months to November

  • GBP: UK employment increases by 208k on a 3m/3m basis in November, well above consensus and Citi expectations (Consensus 110k, Citi 24k). This takes the UK employment rate to record highs of 76.3%. Attention now turns to the more important UK PMI reports for January (preliminary) ahead of the January 30th Board meeting now seen “live” for a 25bp cut. Consensus looks for 48.8 versus 47.5 prior on UK manufacturing PMI, 51.1 versus 50.0 on UK Services and 50.7 versus 49.3 on UK Composite PMI. UK rates currently discount a 76% chance of a MPC rate cut and the data may need to be well above consensus (in particular manufacturing PMI) for rate cut sentiment to fade.        

 

Commodity Bloc: AUD likely to lag on RBA rate cut hopes        

  • AUD: Australian employment print Thursday and Governor Lowe’s speech Friday will likely be key for whether or not the RBA cuts in February (markets are pricing a 50/50 chance of a cut). CESI shows Australian data tends to surprise to the upside in January (that potentially favors “an on hold RBA”). That said, leading employment indicators point to potential weakness and Citi analysts expect RBA to cut 25bp in February. This likely favors a modest downside bias in AUD.    
  • NZD: NZ inflation print on Thursday will be the major focus for NZD this week. Citi analysts forecast a solid 0.5% MoM, slightly above expectations at 0.4% which should be supportive for NZD. Higher NZ inflation should keep the RBNZ at 1.00% through all of 2020.  
  • CAD: Citi analysts expect a constructive BoC meeting tonight and for rate path pricing to return to neutral/hike in the medium term with CAD outperformance still a theme for Q1 (versus USD and AUD). The thawing in trade tensions (USMCA and US-China), investment already seeing a renewed pickup, consumer spending and housing activity moderating but fiscal support potentially coming in 2020, should see Canadian short rates pricing out any prospect of BoC rate cuts this year – CAD supportive.          

 

This is an extract from the Daily Currency Update, dated January 22, 2020. Please approach a Citigold Relationship Manager if you would like more information.

 

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(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 25 million; or

(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).

GLOBAL CONSUMER BANK (ASIA PACIFIC AND EMEA):

“Citi analysts” refer to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”), Citi Global Wealth Investments (“CGWI”) and voting members of the Citi Global Investment Committee.
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be incomplete or condensed. All opinions and estimates constitute CGMI and CGWI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended
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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

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This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
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