Your browser does not support JavaScript! Pls enable JavaScript and try again.

FX

US exceptionalism driving USD strength; Gold outperforms on the ultra-low rates outlook while JPY behaves like an Asia EM currency

Posted on

US exceptionalism driving USD strength; Gold outperforms on the ultra-low rates outlook while JPY behaves like an Asia EM currency                                         

  • USD: News in South Korea of 31 new coronavirus cases in one day, in what the media terms another “super-spreader” event, as well as a South Korean technology company quarantining 800 workers, causes weakness across the Asia FX complex versus USD with CNH, KRW, SGD, MYR and THB hit hardest, while IDR sees BI intervention and a rate cut to push it lower. Contagion spreads onto G10 FX with EUR, the commodity bloc and even JPY (that now seems to be trading like an Asian EM currency) on the defensive as the impact of the coronavirus outbreak continues to be pervasive. This makes USD attractive amid US data strength (US Philiy Fed business activity index overnight outperforming an on an ISM adjusted basis and moving up from 54.7 to 58.0) and global risk aversion. USDJPY now trades with a 112 handle, EURUSD remains below 1.08 while USDCNH tests up to 7.04 which sees AUDUSD under pressure, dropping to the low 0.66 level as the broad based USD Index (DXY) trades to its highest level in almost 3 years.                                
  • GOLD: Spot bullion is well above $1,600/oz and Cit analysts point to the set-up in Gold options markets as being reminiscent of 2010/2011, when it last traded at $1,800-1,900/oz. Meanwhile, gold net long positioning—when normalized for the expanded asset base—is at only half the levels of the 2011 peak. Slowing physical demand in Asia, which still take down ~45% of annual world supply, is a bearish risk for bullion. But investor inflows and central bank gold buying are significant buffers for gold consumption and more importantly, the gains in Gold come even as USD continues to strengthen (breaking the inverse correlation between Gold and USD in the process).
  • JPY: Inability of USDJPY to fall on Coronavirus – led risk aversion, looks to be an important “tell” signal as JPY selling by pension funds and other Japanese investors seems to buoy USDJPY. But this may peak in March and USDJPY could then be more vulnerable to risk-off events again.          
  • CNY: Chinese January credit data released yesterday, surges in January (Aggregate financing CNY5.07trn versus 4.2trn consensus) - This data will capture part of the Coronavirus impact, but also the government’s response. Seasonal factors such as the timing of Chinese New Year will also likely blur the read-through. Meanwhile, the PBoC also cuts the 1Yr LPR from 4.15% to 4.05% and the 5Yr rate from 4.8% to 4.75% (as expected). Bigger picture, this fits into China’s more accommodative monetary and fiscal policy stance to help combat the slowdown from Coronavirus.   

 

EUR: Next EUR catalyst – PMIs today

  • EUR: German consumer confidence consolidates after jump - Germany’s GfK consumption climate edges down from 9.9 in February to 9.8 in March (consensus 9.8, Citi 9.9), following a big jump in the previous month. The long-run average is 7.5 vs the all-time high at 10.8 in Feb’18. GfK reports a rise in economic expectations (despite the Coronavirus outbreak) but a fall in income expectations and purchasing intentions.
  • EUR: Bottom Line - Markets await today’s release of German February manufacturing PMI (Citi at 44.5 versus 44.8 consensus) and euro zone manufacturing PMI (Citi at 47.3 versus 47.4 consensus). EURUSD has weakened with the euro zone more exposed to a Chinese slowdown than the US. However, Citi analysts highlight that Chinese policy easing will likely be supportive of European exports, but with a lag of around six months.

 

GBP: Rebound in UK retail sales follows stronger CPI and jobs data     

  • GBP: UK retail sales growth returns in January for the first time since July 2019, up 1.6% MM – the highest since 2018 (consensus 0.8% MM, Citi 1.0% MM). This robust rebound follows the longest period with no month on month growth on record. Retail sales including auto fuel are also up 0.8% MM (consensus 0.6%, Citi 0.7%) compared to -0.6% MM in November. However, Y-o-Y growth remains subdued, but reflecting strong base effects and the cumulative impact of recent weakness. Y-o-Y growth in retail sales excluding auto-fuels falls to 1.2% YY, 2 percentage points below the 2016-2018 average and 2.9pp below the rate in H1-2019.   
  • GBP: Consistent with initial recovery Retail sales data is consistent with an initial rebound in consumer sentiment. Some of the rebound likely reflects the inherent propensity of mean reversion on a month on month basis – this seems especially likely to have driven the sharp rebound in sales in less discretionary components. However, the discretionary components also improve and may grow further if household sentiment and the housing market recovers as Citi analysts expect over coming months.                 

 

Commodity Bloc: Australia - RBA rate cuts cannot yet be ruled out                

  • AUD: Subdued January labor force data - After relatively strong labor force surveys in the December quarter, the labor market has a more subdued start to 2020. Employment increases by 13.5k in January (consensus: 10k) but the unemployment rate rises from 5.1% to 5.3%, (consensus at 5.2%) driven by weak employment growth, at 1.8%y/y, its slowest pace since March 2017. That said, the uptick in the unemployment rate is largely from the increase in the participation rate from 66% to 66.1%.    
  • AUD: Implications for monetary policy - Weak Q4 wages growth data and slower employment growth are largely in-line with the RBA’s forecasts. While the RBA will be hoping that a turnaround in the housing market can boost consumption and dwelling investment, the uptick in the participation rate could catch the Bank off-guard again. With slower employment growth, Citi analysts believe the unemployment rate will remain anchored at 5¼%, with risks that it could be higher and consequently expect a 25bps rate cut likely in May (or later in the year).               

 

 

This is an extract from the Daily Currency Update, dated February 21, 2020. Please approach a Citigold Relationship Manager if you would like more information.

 

Related Articles