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Risk off Sentiment Adds to USD Upside

Risk off Sentiment Adds to USD Upside 

  • Bloomberg, citing sources, claims a delegation of US deputies will conduct talks beginning February 11, with US trade negotiator Lighthizer and Treasury Secretary Mnuchin joining later in the week after which they will make a recommendation to President Trump on whether he should take a meeting with Chinese President Xi. Economic Advisor Larry Kudlow emerges to say there is still a “pretty sizable distance to go” in US-China trade talks, though adding that Trump would likely meet [with Xi] at “some point” but unnamed CNBC sources claim President Trump would not meet President Xi before the March 1 deadline. Trump later appears to confirm this.



EUR & GBP: German manufacturing possibly in recession; Brexit entering critical phase but default to “No Deal” Brexit still looks unlikely                                  

  • German industrial output falls -0.4%MoM in December, suggesting that the manufacturing, construction and utilities sector fell by -1.5%QoQ in Q4. With German output also declining in Q3, this potentially puts Germany’s manufacturing sector in a technical recession in H2’2018 (likely to be confirmed by German GDP data due next Thursday).


  • EUR yielding to pressure - With Germany’s economy likely to have fallen into recession in H2 2018 and euro area economic forecasts slashed, the drop in German Bund yields bears watching (now at 11bp and at late 2016 lows and possibly opening the door to zero). Widening yield differentials with the US is pressuring EUR to decline further.


  • Brexit: Latest out of Brussels - EU's Guy Verhofstadt comments - "Mrs May has accepted there has to be a backstop in the Withdrawal Agreement" and there’s only room for manoeuver on the Political Declaration. But in all likelihood however, a UK parliament vote on PM May’s deal is now unlikely to take place on February 13/14 – most likely delayed to February end. Possible scenarios – a “no deal” Brexit still the default but looks highly unlikely: (1) EU could offer a time-limited Irish backstop, but only if PM May can guarantee it passing UK parliament. She'll need to head back to UK to discuss a time-limited backstop, OR (2) If that doesn't look as though it will be enough for Brexit hardliners, then PM May could adopt UK opposition leader Corbyn's customs union pledge in the (non-binding) future declaration. Enough Brexit hardliners (the ERG group) have suggested they'd be ok with this.



Commodity bloc: NZ jobs consistent with goal of maximum employment; AUD supported by iron ore prices

  • By all the headline metrics, the NZ labor market underperforms in Q4 against expectations. Employment rises 0.1% (vs mkt f/c 0.3%), the unemployment rate rises to 4.3% (vs 4.1%) and participation rate eases to 70.9% (vs 71.1%). The data shows a clear pay-back for the strength in Q3…. but the labor market still remains tight with the unemployment rate continuing to decline in trend terms and near historical lows with wage costs slowly picking-up. RBNZ forecasts for Q1 2019 show the labor market remains consistent with the Bank’s expectations and which means that the NZ labor market remains consistent with the objective of maximum sustainable employment.


  • AUD appears to be holding up better than expected amid Cross/AUD flows supported by the gains in iron ore prices. Citi analysts note the tragedy in Brazil is leading to the suspension of significant iron ore production. As a result, Citi analysts raise their base case 0-3 month point price forecast to $100/t for 62% iron ore fines and their 2019 year average forecast to $88/t.



Asia EM: Timing the China Easing Impact

  • Citi analysts note evidence that suggests Korean data could lead Chinese data momentum by around 3 months and find the recent uptick in Korean data momentum back into positive territory potentially suggests Chinese data momentum could also take a meaningful change in direction before Q2 this year. Interestingly, Korea is seen as a leading indicator for both China and euro zone data.



This is an extract from the Daily Currency Update, dated 8th February 2019. Please approach a Citigold Relationship Manager if you would like more information

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