-->UK chancellor’s resignation could clear path for larger scale stimulus; Markets fade response to new methodology on Coronavirus cases
- GBP: UK chancellor Javid’s resignation overnight could clear path for more large scale fiscal stimulus. Rishi Sunak is the new Chancellor and reports suggest he will give the PM’s team direct control over the Budget and Treasury by fusing their advisory teams. Large scale fiscal easing now looks likely but later than the March budget — Citi analysts currently expect two fiscal events in 2020, one on 11 March and one in the autumn. Javid’s resignation makes it more likely that the Conservatives jettison their 2019 fiscal framework sooner, paving the way for large fiscal easing in the 2020/21 fiscal year. Crucially, this could now include tax cuts, which would likely be more immediately effective in boosting GDP growth than additional public investment projects. The change at the Treasury may be too late for an aggressive 11 March Budget, but by the autumn – when a comprehensive spending review is also set to be completed – the fiscal risks are now to the upside. Lower probability of rate cuts — Citi analysts’ base case remains for a 25bp insurance rate cut by August (UK rates currently discount a 80% chance of an August 25bp cut). However, if tax cuts of 1% of GDP are brought forward to the 11 March Budget (alongside the already planned 0.6% of GDP of net easing from the 2019 Spending Review), there is a risk that any cuts in 2020 would be pushed back. In addition, substantial fiscal easing in early 2021 could also help to offset the immediate economic impact of a hard Brexit, reducing the probability of further cuts in Q1-2021.
- Safe Havens (JPY, Gold & CHF): A jump in new reported virus cases sees renewed demand for Safe Havens (with USD seeing better inflows) as “Hubei reports 14,840 new Coronavirus cases after the method is revised”. It seems that the standard may have changed from a less conservative form (which may have explained perceptions that cases have stabilized) to a more conservative one advocated by WHO. A direct response from the Hubei province explains courtesy of Reuters – “It has carried out a review of past suspected cases, and revised its data to include “clinically diagnosed” cases in its daily disclosure. Of the 14,840 new cases, 13,332 are from the new category, so using the "old" way of counting, the increase is 1.508”. Comparison with SARS – The number of new cases in SARS was also revised up at the start and middle of the month. This then saw a sharp spike up in cases reported, but markets instead, focused on the overall path of the rate of new infections (the rate of new infections has not changed under the new methodology for Coronavirus) rather than on revisions. As a result, the upward revisions in SARS cases in May 2003 were looked past as markets stabilized after end-Apr’03.
USD: DXY continues to rally with a strong US CPI print helping amid ongoing risk concerns
- USD: US core CPI is up 0.242% in January, in line with consensus at 0.2% and Citi at 0.21%. The Y-o-Y measure remains at 2.3%. while headline CPI rises to 2.5%YoY. The strong core CPI will likely be supportive of US core PCE inflation rising closer to 2% over the next few months. This should help ease concerns that inflation is too persistently low and support policy rates unchanged.
EUR: Selloff starting at beginning of February continues unabated
- EUR: A list reasons for the current EUR selloff – (1) EU less US (hard) data momentum is turning negative – we are yet to see improvements in euro zone “soft” data (PMIs, IFO, ZEW, consumer and business confidence surveys) translate into stronger “hard” data; (2) Downward revisions to near term Chinese and global growth in the face of the COVID-19 outbreak to impact the euro zone more given supply chain linkages between Europe and China; (3) EUR used as a funding currency, given currently receding volatility in rates markets, creating a carry friendly environment; (4) EUR debt issuance by corporates - there is anecdotal evidence of continued large EUR issuance by corporates, including in the US, to take advantage of low euro zone interest rates/debt issuance costs. This is EUR-negative, as many of these corporates would swap the euros raised back into their main currency (notably USD); (5) Speculation about a dovish ECB - Media reports suggest several ECB officials are considering additional easing while ECB Chief Economist Lane notes ECB is not yet at the ‘reversal’ rate below which rate cuts become contractionary.
GBP: BoE rate cut prospects may fade if UK delivers fiscal stimulus
- GBP: Is the best performer overnight within G10 following UK chancellor Javid’s resignation, with buying led by the hedge fund segment. Javid’s resignation brings talk of a more aggressive fiscal loosening in the UK though probably in H2’20 rather than at the March 11 budget. Note however that UK rates still continue to price in about 18bps of a cut by the end of the year but that may start to fade if – (1) hard data (UK GDP) mirrors the uptick seen in UK soft data (these prints will not emerge for a few weeks, or (2) signals regarding fiscal loosening start to get louder.
Commodity Bloc: RBA and BoC Governors in a panel discussion at the Australia-Canada Economic Leadership Forum
- AUD & CAD: RBA Governor Lowe is upbeat in yesterday’s speech, saying that absent the virus, Australia’s outlook was improving and China has made very clear it will stimulate in response to the Coronavirus that will be good for the Australian economy. Meanwhile, BoC Governor Poloz’s speech is not so upbeat with him noting that even though financial system is more resilient than 10 years ago, financial vulnerabilities could still undermine future growth. He has no quibbles about what markets are signaling – bond market signaling downside risks continue to exist. Comment – It is important to keep in mind where the 2 economies are coming from – Australia is recovering whereas Canada may have seen its best months in 2019. AUDCAD cross is trading at levels (0.8910) not seen since 2010 and AUD looks cheap relative to CAD. But the Coronavirus outbreak has complicated the near term outlook.
This is an extract from the Daily Currency Update, dated February 14, 2020. Please approach a Citigold Relationship Manager if you would like more information.