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USD Continues Sell-off Overnight

USD Continues Sell-off Overnight       

  • Developments on the US government shutdown overnight (now in its 17th day) sees the Republicans and Democrats moving even further apart on the border wall – (1) Trump does not declare a national emergency nor does he hint towards one but points to a barrier on the southern border as being “absolutely critical” to boarder security. (2) Trump further says "Republicans are unified…..during the meeting [with Senate Republicans], there is "no discussion about anything other than solidarity." (3) On the Democrats side, they too are sticking together under the party line that "the government needs to reopen before any discussions on border security begins." Hakeem Jeffries of New York, a member of the House Democratic leadership says Democrats are willing to “substantially increase” funds for border security using drones, technology and existing fencing - but not a wall.

 

  • More positive soundbites from the US – China trade talks; Key highlights – (1) US and China extend talks to a 3rd day amid signs progress. A spokesperson for the US Trade Representative’s office, which is leading the US negotiating team, says talks would continue on Wednesday (US time) and “a statement will likely follow then.” (2) Talks focus on China’s pledge to purchase a substantial amount of agricultural, energy, manufactured goods, and other products and services from the US. On that score, an important development sees China approve its first GMO crop imports from the US. This comes on top of reports that “Chinese importers have made their third large soybean purchase from the US in the last month on Monday.

 

  • FOMC Minutes/ Fed speak dovish , reinforce “patience” and data dependency – (1) FOMC Minutes read dovish with an extended discussion regarding the uncertainty in timing of future hikes with some participants even suggesting removing forward guidance all together. (2) On Fed balance sheet, mention of “slowing portfolio redemptions” as a potential step for policy reads as an option to tweak the balance sheet runoff. (3) The Minutes also elaborate on inflation, ending with “reports from business contacts and surveys in some other Districts suggesting some moderation in inflationary pressure.” (4) Fed speak: President Bostic - surprises by saying he is now open to a move in either direction – a cut or a hike if downside risks “all come to bear.” Fed President Evans – emphasizes patience with an explicit reference to H1 2019 saying "I think developments in the first half of 2019 will be very important for making this assessment of our future monetary policy actions". Fed President Rosengren – similar to Bostic, now says both a hike or cut could be on the table.

 

 

GBP: Brexit - New amendment forces tighter timetable making a ‘No Deal’ Brexit even less likely                                    

  • Following the defeat of PM May on an amendment to the government financing bill on Monday which would prevent the UK government from using taxation powers in the bill to implement a “No Deal” - in other words, there would be no cash forthcoming for a “No Deal” Brexit unless UK parliament is on board (and parliament has made clear it won’t be), PM May is for a 2nd time, defeated over (a new) bill.

 

  • The Grieve amendment is a second defeat in as many days for PM May and means is that if the Meaningful Vote fails on Jan 15, then she would have only until Monday January 21 (i.e. 3 working days) to produce a plan B to present to parliament. UK MPs introduce this amendment overnight to prevent PM May from running down the clock to bounce MPs into supporting her deal (or a “No deal” Brexit). The impact would be to transfer significant power to the UK parliament to determine what kind of Brexit or no-Brexit the UK will have – should PM May lose the vote on her Brexit plan next week.

 

  • Bottom Line - Citi analysts see "No Deal" risks as overpriced and the likelihood of the Withdrawal Deal eventually passing (even if not on the first attempt on January 15th) as underpriced. Passage would require some combination of Tory/DUP/Labor opponents to vote in favor of the deal (or at least abstain) that may only come in a later vote.

 

 

Commodity bloc: BoC – Rates to rise “over time” given temporary headwinds; Aussie building approvals down but not seeing hard landing                                    

  • BoC leaves its policy rate unchanged at 1.75% overnight and the updated Monetary Policy Report reveals lower growth and inflation forecasts. However, headwinds to growth, particularly from falling oil prices are expected to be temporary and underlying fundamentals of the Canadian economy, such as the labor market, remain solid. The BoC maintains its position that rates will need to rise “into a neutral range”, but adds a qualifier that this change will occur “over time”. For now, Citi analysts continue to pencil in the next hike in April, but with risk that it is delayed further.

 

  • Australian building approvals fall in November, down -9.1% and sharply lower than expectation for -0.3% with the number of monthly approvals at 15.5k at their lowest since August 2013. However the decline comes almost solely from apartment approvals while the more important new house approvals show little signs of a credit related slowdown. Citi analysts also expect better leading data on labor demand to likely argue against a hard landing for housing.

 

 

Asia EM: China may introduce more fiscal measures in coming weeks                                    

  • According to sources, China’s Finance Ministry is set to propose a small increase in the targeted budget deficit for this year to 2.8% of GDP (vs 2.6% in 2018), pointing to more fiscal stimulus measures. On that note, there is potential that the Central Committee of the China’s Communist Party could meet later this month. Bloomberg points out that nearly half of China’s 31 regions that normally hold annual legislative and advisory meetings have suddenly rescheduled them this month, to create a window from January 19 - 22. That’s the usual length of time required for a full meeting of the Central Committee and the meeting may be used to signal major reforms and may be closely watched.

 

 

This is an extract from the Daily Currency Update, dated 10th January 2019. Please approach a Citigold Relationship Manager if you would like more information

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