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USD continues its relentless rally for now; Coronavirus – possible peak before month end?

-->USD continues its relentless rally for now; Coronavirus – possible peak before month end?                       
  • USD: The overnight price action sees USD continue its rally and once again, a number of reasons seem to be given for the rally – (1) EUR weakness (and by default USD strength) following weak European investor confidence  and German chancellor’s chosen successor Annegret Kramp-Karrenbauer’s surprising announcement to step aside. (2) Renewed concerns about Coronavirus hitting commodity currencies as commodities come under pressure (Oil closing below the 50 handle). (3) A “buy USD” on the back of President Trump’s budget proposal for the next fiscal year introduced overnight that includes: (1) relatively optimistic US economic projections; and (2) Tax cuts - proposes extension of 2017 tax cuts through 2035 at a cost of USD1.4tn. COMMENT - Note however, that with President Trump not in control of Congress – especially in an election year and the budget violating the 2019 two-year deal that Congress and the Trump administration agreed on last year, it is difficult to see such proposals gaining traction in Congress.          
  • USD: But perhaps the most credible reason for USD strength so far this year is probably due to foreign (Japanese and European) investor buying of US bonds – with the latest Japan Ministry of Finance data showing Japanese trust banks that typically handle investments for pension funds, buying a net 2.02 trillion yen ($18.4 billion) of foreign fixed-income securities, the biggest ever monthly purchase and exceeding the previous all-time high of 1.24 trillion yen set in November 2018. More importantly, with the cost of hedging their underlying funding costs at prohibitively expensive levels, it seems likely that Japanese and Europeans investors could be taking a currency bet in the process to buy unhedged (ie. buying USD and selling JPY and EUR).                       
  • Safe Havens (JPY, Gold & CHF): Coronavirus - Where are we now? There are 40.3k+ confirmed cases globally with 40k are in China, but the case count continues to climb, with Singapore, Hong Kong, Thailand, Japan, South Korea, Taiwan and Malaysia most afflicted. At the same time, there is also a pickup in recoveries (again concentrated in China) and the  general market narrative seems to center around the pace of new infections in China slowing with continued PBoC easing action also helping market sentiment. A study from the London School of Tropical Hygiene projects a likely mid-to-late-February peak in Wuhan and commentary from other experts also points to mid-end February as a critical time to understand the evolution of the virus, and whether it may have peaked in China, at least            

 

EUR: No one stepping up to buy for now                                          

  • EUR: Falls for the sixth straight day with weakness attributed to (1) weak European investor confidence data - euro area investor confidence falls in February with the Sentix investor confidence index for the euro zone dropping from 7.6 in January to 5.2 in February (consensus 5.9). This is the first decline since October 2019Sentix is often seen a good predictor for the more widely followed ZEW German Investor Confidence index which comes out next week and could provide a first gauge of the economic impact of the Wuhan outbreak; (2) Political uncertainties in Germany following German chancellor’s chosen successor Annegret Kramp-Karrenbauer (AKK) stepping down on the “unclear relationship” between CDU and far right party AfD as part of the reason behind the decision.            

 

GBP: Time to be more cautious ahead of buy levels at 1.2770

  • GBP Outlook – Sterling is being given the same treatment as handed out to other G10 FX versus USD currently, as markets ignore BoE’s recent relatively hawkish stance even if it is watered down to “reinforce the UK recovery”. The Citi analyst 2020 view remains for an H1 UK economic recovery helping to clear the structural underweight in foreign ownership of GBP denominated assets, accompanied by moderating Brexit risk premia vs the Withdrawal phase. Also note that the MPC forecasts don’t seem to factor in fiscal stimulus from the Conservative manifesto in the March 11 budget – additional fiscal stimulus could prevent the BoE does from cutting rates at all this year.  

 

Commodity Bloc: Week Ahead – RBNZ board meeting in focus                         

  • NZD: RBNZ Monetary Policy Meeting: Citi forecast; 1.00%, Previous; 1.00% - RBNZ is expected to leave the OCR unchanged at 1% in the February MPC meeting Thursday and Citi analysts expect the Bank will remain on hold this year. A risk to the Citi analyst view is that a drop in tourism from the coronavirus could weigh on Q1 growth, which could lead to downward revisions.   
  • CAD: This week sees a panel presentation by Governor Poloz that could be one of the last times we hear from the BoC before the March meeting. Canadian January home sales data should show a continued rise in home prices.       

     

Asia EM: China CPI hits new high on holiday effect and Coronavirus 

  • China’s consumer prices rise more than implied by seasonality, and the 2019-nCoV outbreak may continue to impose an inflationary bias to CPI – Headline CPI jumps to 5.4%YoY in January, up from 4.5% in December and much higher than expected (Citi/Mkt: 5.0%/4.9%). Citi analysts revise up their CPI inflation forecast from the previous 3.2% to 3.4%YoY for 2020. 
  • Policy and Market Response - PBoC is likely to ignore the significant tick-up in China CPI and instead keep liquidity ample amid coronavirus fears. PBoC sold RMB 600bn via 7d reverse repos at 2.4%, and 200bn via 14d reverse repos at 2.55% on Monday. SGD remains vulnerable as Bloomberg reports the SGD NEER has fallen to near its lowest in more than three years (currently trading 40 pips above the mid band) as deepening concern over Coronavirus spread talk of MAS monetary policy easing as early as April. Singapore as of Friday stepped up its disease response level to orange, the same level as during the SARS outbreak   

 

This is an extract from the Daily Currency Update, dated February 11, 2020. Please approach a Citigold Relationship Manager if you would like more information.

 

 

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