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Rising global tensions inject a bid tone in USD

Political tensions escalate once again – another US government shutdown looming while Italy and Spain drive euro lower 




  • Euro is the prime victim of the broader move higher in USD overnight but also as Italy and Spain come into focus (1) Italy is back in headlines with Euro group President Mario Centeno saying “we will review Italy at the end of spring”. The comments relate to the EU – Italy agreement on a 2019 budget deficit target of 2.04% of GDP but followed by the EC slashing Italy’s growth outlook to just 0.2% (thereby undermining the agreement on the budget defici8t target). Centeno’s comments come ahead of Fitch’s review of Italy's credit rating on February 22 (it already has a negative outlook with BBB rating). (2) Spain’s PM is reportedly considering early elections as PM Sanchez is under fire for his budget proposals and accusations of being too "soft" in talks with Catalan separatists. Sanchez faces a key vote on Wednesday when he attempts to pass his budget in parliament.    
  • Latest developments on the US government shutdown - talks to avoid another shutdown appear to have stall once again and without new legislation, funding will likely run out on Friday. Politico writes, “the latest impasse suggests Democrats are not seeing much incentive to concede to the Trump administration’s requests for billions of dollars in border wall money, after winning the last round of shutdown negotiations.” An extended shutdown would likely be USD negative but ahead of Friday, gathering expectations for a shutdown should at least limit the upside.     


Escalating global political tensions once again leading to near term gains but upside firmly capped                               

  • A broad USD bid highlights Monday’s session, alongside higher UST yields and choppy trading in oil and equities. EM FX underperforms while in G10, weakness is seen across the remaining G3 (JPY and EUR breaking above 110 and below 1.1300 respectively) pending event risk - trade talks, another looming US government shutdown and political tensions in Italy/ Spain.  


  • This week sees the resumption of US – China trade talks (14-15 Feb). Equally important is the Section 232 Report on auto imports due on 17 February where tariffs may be recommended on certain sections of the industry though may not be made public for now and may even exempt EU and Japan from any potential tariffs. Data wise, Citi analysts expect US core CPI (Wednesday) at 0.2%MM (consensus 0.2%) and PPI Final Demand (Thursday) at 0.0%MM (consensus 0.1%).  


Brexit – Awaiting Thursday’s UK Parliament debate and amendments on Brexit

  • GBP slips below 1.2900 in NY, largely reflective of the broad USD bid but helped by soft UK data  in the form of a weaker UK Q4 GDP at 0.2%QoQ (vs a consensus estimate of 0.3%) and the month-on-month GDP for December at a woeful -0.4% (versus consensus looking for 0.0%) and with business investment falling for a fourth successive quarter due to Brexit uncertainty and the global slowdown. 
  • Latest developments on Brexit - UK PM May will give a statement tonight to update Parliament on Brexit and in advance of Thursday’s debate where it will host another long night of amendment votes (note PM May will not to hold another Meaningful Vote on Thursday, that is now seen delayed to month end). Citi analysts see 3 possible options for Thursday’s outcome – (1) the UK parliament votes to give PM May the mandate to take the negotiations further to the brink; (2) UK parliament votes to stop or re-set the clock (no Brexit at least for now, through Article 50 extension or revocation) or (3) abort attempts to secure a deal and prepare for no-deal Brexit. Citi’s base case is the UK Parliament is likely to take negotiations further to the brink. Importantly, Citi analysts do not see any majority for a “No Deal” Brexit in Parliament or a willingness of the UK government to actively pursue it.    
  • The week ahead in euro zone sees the release of December industrial production (consensus -0.4%), German Q4 GDP (consensus +0.1%) and UK core CPI (consensus 1.9%). Attention will also be on the US Department of Commerce report on auto imports by February 17th though it may not be made public for now and could even exempt the EU and Japan from any potential tariffs. Nevertheless, nervousness about its findings is likely to weigh on euro. During the week, there will also be various ECB officials holding speeches. In the UK, on Thursday, PM May is set to put down an amendable motion relating to Brexit. This will provide another chance to assess the will to block no-deal. 

RBNZ to move to neutral but not validate rate cuts

  • RBNZ statement on Thursday is likely to place more emphasis on downside risks to the rates outlook, consistent with the line taken by RBA, BoE and ECB recently. This would also reflect changes to growth risks in major trading partners and 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


Developments relating to China after the New Year holidays       

  • (1) US – China trade talks resume with lower-level officials having already kicked off the meetings on Monday to be followed by higher principal-level talks on Thursday and Friday with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. (2) Xi-Trump meeting?  CNBC reports last week that Presidents Trump and Xi are “unlikely” to meet before March 1 but Axios reports that “Xi may soon come to Mar-a-Lago as Trump's advisers discuss holding a summit there later in March with President Xi. (3) Spot moves - USDCNY fixes yesterday at 6.7495 against market expectations for a fix around 6.7521 indicative of the strong support around the 6.70 level for now. (4) GDP forecasts - China 2019 GDP is expected to slow to 6.3% in 2019 v 6.6% in 2018 (versus prior speculation of 6.0-6.5%), according to local press Xinhua.     


This is an extract from the Daily Currency Update, dated 12th February 2019. Please approach a Citigold Relationship Manager if you would like more information

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