Solid tactical bid into Safe Havens & USD continues as Coronavirus/ US political risks take center stage

Solid tactical bid into Safe Havens & USD continues as Coronavirus/ US political risks take center stage              

• Safe Havens (Gold, JPY, CHF) & USD: It’s a somber start to the week, with Coronavirus and US political headlines combined with holidays in much of Asia making for a negative mix overnight. The risk-off reaction sees Yen as the prime beneficiary in FX with USDJPY breaking below the 109 handle and Gold up through 1580 while USDCNH tests as high as 6.99. This comes as investors sell risk assets such as equities (S&P 500 and Dow Jones decline 54 and 454 points respectively) with the situation no better in Europe with the Eurstoxx 200 selling off almost 2%. 

• Safe Havens (Gold, JPY, CHF) & USD: Coronavirus headlines - China extends its Lunar New Year holidays until the end of the week (Shanghai stock exchange holiday now extends to February 3). China also says it will suspend overseas tour groups and flight/hotel vacation packages for Chinese citizens. Almost 2800 cases of infection in 12 countries with US announcing it is reviewing 110+ patients for potential diagnosis across 26 states sees the US State Department raising its China travel warning while the World Health Organization raises its global risk around the virus from “moderate” to “medium.” Most market strategists see the next 10 days as crucial and are cautious on risk appetite near short term with the flight to Safe Havens seen unlikely to fade so soon.                

• USD: Gains overnight with the broad based USD Index closing the session at 97.95 (last seen in November 2019) even as 2 sets of US political risks gain traction – (1) Democratic primaries begin on February 3, but the real action will likely be on Super Tuesday (March 3) with the risk of a dark horse candidate emerging material, particularly Sanders, Bloomberg or Steyer.  (2) President Trump impeachment risk gain traction with increased pressure on Republican Senators to vote to call witnesses following ex-White House National Security Advisor John Bolton's book release. It would take 4 dissenters among the Republican party ranks within the Senate to see witnesses.  

• USD: FOMC preview - For a second consecutive meeting, the FOMC is widely expected to leave the policy range unchanged though a 5bp increase in IOER is likely, but not a foregone conclusion. Fed officials are equally unlikely to push back against the slightly increased probability of a rate cut priced-into 2020. Citi analysts also expect a taper of the USD60bn/mth in T-bill purchases to about USD20bn/mth over March-June as well as a standing repo facility rolled out later this year. Data wise, Citi analysts forecast 2.4% US Q4 real GDP growth.                             

EUR: Italy risk lower; German IFO shows manufacturing stabilizing                                

• EUR: Italy political risk lowered as Lega loses in Emilia-Romagna - the key regional election of Emilia-Romagna on Sunday sees the Democratic Party (PD) incumbent candidate leading the Lega candidate. A defeat for the ruling parties would have destabilized the fragile PD/M5S coalition government further given the resignation of their leader Luigi di Maio amid MP defections to Lega. As a result, markets were cognizant of Italy political risk and a Lega win would have increased the risk of a worst case scenario – snap elections in Italy favoring the far right euro skeptic Lega-led government of Salvini. Therefore this result in Emilia-Romagna likely provides much-needed relief for the PD/Five Star coalition government and the euro as snap election risk in Italy is re-priced lower.    

• EUR: After a better ZEW, the German IFO survey overnight disappoints somewhat with the German business climate index declining in January for the first time in five months, down 0.4pts MM to 95.9, consensus at 97.0 and with business expectations worsening by 1.0pt MM to 92.9, following a 1.7pts gain in Dec-19.  However, the current condition assessments improves by 0.3pts MM to 99.1 and is pivotal for the manufacturing sector, the epicenter of the German and euro zone slowdown of the past 2 years (this improves from -5 to -1.6). Ifo comments demand in the industrial sector has increased and there is reason for cautious optimism. Ifo expects German GDP to expand by 0.2% QQ in 1Q-20.       

GBP: BoE Board unlikely to cut rates this week

• GBP: Friday marks the official UK leave date from the EU. In the UK itself, Citi analysts expect BoE on remain hold this week given the stronger UK PMI releases Friday and only expect a 25bp insurance rate cut by August (though a cut this week may not entirely be a surprise). In addition, BoE economists may revise up their UK growth and inflation forecasts.    

Commodity Bloc: BoC now more dovish vs more upbeat RBA/ RBNZ                  

• CAD: Citi analysts’ base case is for a rebound in temporarily weak Canadian data in coming months to likely to keep the BoC on hold in 2020. That said, the probability of a BoC rate cut at upcoming meetings has likely increased following the BoC’s surprising dovish turn at its most recent meeting with Canadian short rates pricing a full 25bp BoC rate cut before year -end.

• AUD: Meanwhile, Citi analysts now push their 25bp RBA rate cut forecast from February to May 2020, which is in line with current market pricing. This follows Australia’s unemployment rate that is now below the RBA’s forecast of 5.2% for December 2019 and follows stronger housing finance and retail sales data for November. It  would likely take a weaker trimmed mean CPI print to push the RBA into cutting on February 4 (data due January 29th - Citi analysts forecast a decent 0.4% QoQ which is in-line with RBA’s implicit Q4 forecast, which on its own is unlikely to get RBA to cut the cash rate target).      

• NZD: The quarterly gain in NZ Q4 CPI last week means that yearly CPI inflation is up from 1.5% to 1.9%, closest that inflation has been to the 2.0% RBNZ target mid-point in four quarters and importantly, is above the RBNZ’s November 2019 forecast for CPI inflation of 1.6%. With NZ activity indicators and CPI inflation higher than expected and importantly above the RBNZ’s forecast, Citi analysts retain their forecast for no change to the RBNZ cash rate this year.         

This is an extract from the Daily Currency Update, dated January 28, 2020. Please approach a Citigold Relationship Manager if you would like more information.