USD bid on US tax cut hopes; Technical recession in Germany likely followed by a broad based euro zone recovery - ZEW survey

USD bid on US tax cut hopes; Technical recession in Germany likely followed by a broad based euro zone recovery - ZEW survey              

• USD: The broad based USD Index (DXY) trades with a firmer tone overnight while stocks and bond yields are mixed following President Trump’s speech. Key highlights – (1) Once again criticizes the Fed but fails to signal further escalations in China trade talks, stressing the now familiar theme that the US has the upper hand in negotiations but that Phase 1 “could happen soon.” (2) Briefly mentions other trade deals (Japan, EU, USMCA, South Korea) and for the EU cites “high barriers” in negotiations. This sparks a short-lived bout of EUR selling/ USD buying given that the auto tariff report is due (though Citi analysts think it will be delayed). News reports claim that the “US Trade Representative's Office will submit a brief on possible tariffs on autos and auto parts today to allow President Trump to target specific countries & EU for tariffs on autos and auto parts.” Note however that both US Commerce Secretary Ross and EU chief Juncker have played down any prospects of auto tariffs on the EU. (3) USD gets more of a boost from talk of another round of US tax cut headlines with reports saying “Trump aides are mulling a tax plan to cut the middle class tax rate to 15%.” Citi analysts however see high hurdles for any such proposal given a Democratic controlled House, Republican fiscal hawks and amid party impeachment debates.      

• EUR: The broad based EU headline ZEW investor expectations index jumps from -22.8% in October to -2.1% in November (Consensus -13, Citi -5) to approach the recovery quadrant. The current assessment component is virtually unchanged at -25% (Consensus and Citi -22) while expectations improve across the board, falling narrowly short of positive territory (and thus the “recovery quadrant”). In particular, the German ZEW survey shows a stronger recovery with the forward looking expectations segment coming in at -2.1 vs -13.0 expected -22.8 prior. Citi analysts now see an imminent recession in Germany as likely which boosts the case for fiscal stimulus. But this would require changes to EU budget rules and the ZEW survey however suggests the euro zone may well start a recovery phase before fiscal stimulus is delivered.  

• USD: This week, focus remains on US aiming for a deal with China, but uncertainty is likely to persist. Citi analysts expect US auto tariffs decision on EU exports (due tonight) to be delayed. Data wise, Citi analysts expect headline CPI at 0.3%MM and core at 0.198% (consensus 0.2%). This would be consistent with the Fed’s 2% target. However, Citi analysts see roughly balanced risks of either an upside or downside surprise. FOMC speakers include Chair Powell.                  

GBP: UK employment weakens further but overall data mixed; Improved chances of a Conservatives victory and Brexit deal                 

• •GBP: UK employment falls 58K on a 3 month average in September, broadly stronger that expected (Citi 8K, Consensus -102K) with this month’s survey improving by 180k compared to 3M previous. Unemployment also falls marginally but pay growth moderates with average weekly earnings falling to 3.6% on a 3M %YY basis, below the 3.9% growth rate in August (Citi 3.8%, Consensus 3.8%) though trend wage growth remains upward sloping. Bottom Line - UK labor market is the focus for BoE hawks. Broadly, the Bank expects moderating employment growth, with lower earnings growth to follow. However, with unemployment falling, earnings still seemingly on an upward trajectory and this month’s employment print relatively strong, developments here will still be key to watch over the coming months.

• GBP: A Conservative majority and  Boris Johnson Brexit deal is now the most likely outcome, following the Brexit party’s decision not to contest Conservative seats. The second most likely outcome is an economically constrained Labor + Lib-Dem + SNP supply & confidence agreement that opens the door to a People’s Vote without No Deal on the ballot paper. Both options appear sterling supportive. Also watch the fiscal space after election – Citi analysts expect BoE to hike next if voters deliver a decisive majority (either way) on 12 December, due to a clearer Brexit path and more fiscal easing than the BoE forecasts. But also note the risk, albeit reduced of a hung UK parliament – would bring us back to square one, with nothing is resolved and Brexit remaining in limbo.         

Commodity Bloc: Australian business confidence weak despite policy stimuli; NZ inflation expectations slip but RBNZ unchanged                           

• AUD: Australian business confidence improves marginally from 0 to +2 points in October though below the average level this year and the long-run average of +6 points despite three 25bp RBA rate cuts and the government’s tax rebates that started in July. Indicators of employment and labor costs point to modest job gains and soft wages growth but households aren’t confident to spend yet. Thursday sees Australia October Labor Force data (Citi employment forecast +18k, previous +14.7k; unemployment rate forecast 5.2%, previous 5.2%).  

• NZD: NZ 2y inflation expectations slip to 1.8%, lower than the 1.86% previously reported the lowest since late 2016 but RBNZ keeps rates unchanged today. With NZ short rates pricing a 80% probability of a rate cut today, the unchanged stance sees a 100pip + move up in NZDUSD to now above 0.6400.       

• CAD: The key data release in Canada this week will be existing home sales for October, which Citi analysts do not expect to alter the recent trend of strengthening housing activity. BoC Governor Poloz will speak on Thursday, but is not expected to be significantly different from the BoC meeting just two weeks prior. AUD.       

Asia FX: Citi FX strategists still see a supportive backdrop for CNH   

• •CNH: Citi analysts still see scope for a stronger CNH following the signing of the phase one US – China trade deal and suggest an even more bullish RMB price action is likely with exporters having room to step up their FX conversion ratio together with seasonal demand for RMB before Chinese New Year, if US tariffs are rolled back. Data wise in China, Citi analysts expect industrial production to pull back to 5.2%YY in October (consensus 5.4%), retail sales at 8.0%YY (consensus 7.8%), Fixed Asset Investment to moderate to 5.3%YY YTD in October (consensus 5.4%).     

This is an extract from the Daily Currency Update, dated November 13, 2019. Please approach a Citigold Relationship Manager if you would like more information.