Despite positive news for the US in October – promise of a more aggressive Fed and incoming Fed Chair, tax reform as well as better US data including higher average earnings growth – the USD did not sustain its rally. Citi analysts take this as a negative sign in that good news did not help the currency much, signaling that Citi’s base case of a USD bear market in the medium term may be correct.
Meanwhile, Citi analysts believe the EUR may still be supported by its cheap real effective exchange rate and large current account surplus in the medium term – despite the recent sell-off due to the 26 October European Central Bank (ECB) meeting, where ECB President Mario Draghi indicated that the ECB could extend its quantitative easing purchases beyond the September 2018 maturity deadline.
US yields are a critical driver for USDJPY and this will remain the case while the Bank of Japan 10-year yield cap is retained. Citi believes that USDJPY will have near-term gains if tax cuts in the US, a more hawkish Fed or higher wage inflation lead to further gains in US yields.
The macro backdrop is perhaps less positive for AUD going forward. Signs of further tightening of monetary conditions in China – which are generally associated with lower base metal and bulk commodity prices will damage Australian terms of trade and negatively affect the AUD.
Elevated uncertainty surrounding the outcome of Brexit deal negotiations and the current Conservative leadership will likely negatively impact the GBP in the near term. However, with the Bank of England expected to hike interest rates twice in 2018, this may provide some offset.