State of play with respect to key sentiment drivers in FX

State of play with respect to key sentiment drivers in FX - the risk positives (USD negative)

• GBP: Optimism on a Brexit trade deal lifts as UK – EU agree on the Northern Ireland protocol overnight – the joint EU-UK committee under UK’s Minister for Cabinet Office Michael Gove and EU’s Maros Sefcovic find solutions “in principle” for all outstanding issues regarding the Northern Ireland (NI) protocol (the new EU border in the Irish Sea) within the legally binding Withdrawal Agreement signed last year. At the same time, the UK drops its ‘offending clauses’ from the Internal Market Bill which would have broken the Withdrawal Agreement and thus international law and also commits not to introduce any measures that would contravene the Withdrawal Agreement in the looming Finance/ Taxation Bill. The surprise move overnight shows solutions are possible and may help to find a compromise on the Brexit trade deal, as it would seem rather odd to committing to the Northern Ireland protocol but with no agreement on a Brexit trade deal that eventually leads to tariffs imposed by both sides. Bottom Line – The move overnight is likely a step in the right direction of an eventual free trade agreement. Much now depends on a meeting of PM Johnson and EC President von der Leyen in person in Brussels, most likely today and coming ahead of the 2 day EU Summit starting on Thursday.  

• USD: Vaccine progress - UK approves vaccines for emergency use as its rollout begins yesterday. Meanwhile, the US FDA Vaccines Advisory Committee will consider Emergency Use Authorization request on Thursday and is likely to grant approval shortly thereafter. Other vaccine candidates also seem to be vying for attention with China and Russia having approved their respective vaccine candidates that will likely be preferred by developing countries. Focus also turns to the rollout process which will be key for the positive outlook for risk assets into 2021. Developed countries have pre-ordered enough doses to vaccinate their whole population and the delivery of immediate rollout timelines will inform on whether herd immunity can be achieved next year, even if the high-frequency reaction to incoming vaccine news has moderated.

• USD: A US budget deal to fund the US government looks more likely with potential for a COVID relief bill to be tied in. Citi analysts expect a bill just under $1tn but December 18 (instead of December 11) now appears to be the timeline.  House Majority Leader and Democrat Hoyer has underlined his approval for the measure, with Senate Majority Leader and Republican McConnell agreeing to pass it via the Senate.            

The risk negatives – that could bring a tactical bid back into USD                 

• USD: The US is not out of the woods on Covid-19 - COVID headlines continue to emerge as US cases and hospitalizations continue to see a trend higher after a brief respite earlier. The spike is likely attributed to cases linked to large Thanksgiving gatherings which took place roughly two weeks prior. Hospitalizations in major metropolitan areas remain are best proxy for forecasting the rollout of lockdown orders. News late last week is that 85% of California's population is now under a stay at home order with Governor Newsom ordering that when capacity at intensive care units in any of five regions of the state goes below 15%, that region will go into lockdown within 24 hours. Southern California, San Joaquin are also joined by the San Francisco Bay Area under a different set of orders. All in all, it seems that for now, US states (rather than the Federal government) are likely to lead the containment effort, even though there are political and legal limitations.          

• USD: US President-elect Biden in no hurry to undo Trump’s trade tariffs on China – in a NYT interview last week, President-elect Biden  says he would not act immediately to remove the 25% tariffs that Trump has imposed on about half of China’s exports to the US (the Phase 1 agreement Trump inked with China). Biden indicates that he first wants to conduct a full review of the existing agreement with China and consult with traditional allies in Asia and Europe, “so we can develop a coherent strategy. Bloomberg also reports that the Trump administration is looking to implement further sanctions on Chinese officials involved with the HK Security Laws.          

Data releases overnight           

• EUR: German ZEW survey – vaccine boosts investor sentiment – the ZEW investor expectations index for Germany jumps back after two monthly declines, from 39.0 in November to 55.0 in December (consensus and Citi 46.0) while the current assessment component, a proxy for the output gap, edges down further from -64.0 to -66.5 (consensus -66.0, Citi -62.0).            

• AUD: Australia November business confidence portends solid rise in activity – the NAB business confidence index jumps by a large 9 points to a level of +12 in November. At +12 points, business confidence is well ahead of not just at the start of the pandemic but going back to all readings since January 2018. Business conditions gain 7 points to a level of +9 which is also above average with conditions rising in all industries except wholesale. On average, businesses report capacity rates well above the lowest point in the pandemic of 72%. The outlook for non-farm activity also looks brighter but there are no improvement in the main indicator associated with employment -  employment conditions remain unchanged at a level of -5 in November and suggests job gains may have plateaued. Measures of inflation and wages also remain subdued - the sluggishness in employment conditions is also felt in the survey measure of labor costs which rise by just 0.1% in the three months to November thanks to gains in mining and construction. There is even less pressure in the price of final products, which decline by 0.1% in the three months to November. This suggests that the recovery in business confidence and activity is being driven by volumes rather than prices and that inflation pressures remain elusive. 

This is an extract from the Daily Currency Update, dated December 9, 2020. Please approach a Citigold Relationship Manager if you would like more information.