-->USD ends the week on 4 month highs with gains primarily against the euro; China entering a critical phase to tackle Coronavirus
- USD: The broad based USD Index (DXY) ends the week holding above the 99 level and at 4 month highs with EURUSD falling to new lows at 1.0835 (refer to EUR strategy for a detailed discussion about EUR’s decline). Even so, DXY does face pockets of pressure on Friday on the back of soft US core retail sales data that Citi analysts call “slightly discouraging” as it suggests the moderation in US consumption at the end of 2019 could carry over into the first part of 2020. Key data highlights Friday – (1) US headline retail sales rise 0.3%MoM in January, but below Citi at 0.5% while sales in the retail control group are flat on the month. (2) Aircraft manufacturing weighs on Industrial Production (IP) - IP falls -0.3%MoM in January and manufacturing declines 0.1%. Citi analysts had expected a weak IP reading in January due to the Boeing 737-MAX production shutdown. That said, potential supply-chain disruptions due to Coronavirus-related slowdown in China could pose further downside risks to US IP and weaker US data is likely to keep a healthy probability of Fed rate cuts priced-in (currently more than 40bp is discounted into US rates). Citi’s base-case however remains for Fed on hold in 2020.
- USD: The Week Ahead - Fed Minutes may give some insights on balance sheet plans and the policy review. Attention will also turn to the Nevada caucus (22 Feb), with the last debate before Nevada (Feb. 22) to be held Feb. 19. The Nevada Democrat primary is the best proxy for Super Tuesday – where a third of delegates will be awarded and is a better representation of the US on many metrics. The current outlook for Nevada is more clouded given a lack of polls; however, indications suggest that Bernie Sanders will likely remain a front runner in the Democratic nomination process. This risk is yet underpriced by USD investors.
- Safe Havens (JPY, Gold & CHF): As China enters a critical phase in tackling the Coronavirus, Wuhan's quarantine has seen further restrictions with people now not allowed to leave their neighborhoods except to seek medical care, help with medical and quarantine work, or assist in vital functions. Total cases are running nearly at 64k into the weekend. Citi analysts though are more hopeful saying that even with the shock of data revisions in Hubei, the virus shows signs of stabilizing and stimulus may be on the way in China and elsewhere, pointing to the likelihood of a decent rebound in H2’20 that potentially makes EM equities a H2 trade while it may be late-2020 before EA exports to China recover to help EUR in FX markets.
EUR: A critical review of the reasons for euro’s selloff
- EUR: Friday’s data – German GDP comes in unchanged in 4Q 2019 (Consensus 0.1%, Citi 0.0%), following a 0.1% QQ increase in 3Q. However, the headline miss may be down to the upward revision in Q3 from 0.1% to 0.2%. (2) Winter 2020 EU Commission forecasts add 0.1pp to euro zone 2020 and 2021 HICP forecasts to 1.3 and 1.4% respectively while keeping its 2020 and 2021 euro area real GDP projections unchanged at 1.2%. The forecasts assume that the coronavirus outbreak peaks in 1Q-20, with relatively limited global spill-over effects. Week Ahead: Euro zone PMIs and UK core CPI - Citi analysts expect a rebound in UK core inflation to 1.6%YY and retail sales. More important are the next set of euro zone PMI numbers with Citi analysts expecting German manufacturing PMI at 44.5 in February, and euro zone manufacturing PMI down to 47.3.
- EUR: Possible reasons for EUR’s current decline – (1) EU less US (hard) data momentum is turning negative; (2) Downward revisions to 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) Rising political risks in Germany following withdrawal of Merkel’s hand picked candidate which throws a possible fiscal response into doubt; (4) Foreign (Japanese and European) investor buying of US bonds FX unhedged; (5) A poor technical picture. Bottom Line - Drivers 1, 2, 4 and 5 appear linked to Coronavirus while 3 (German political risks) is more longer term but likely pales in comparison with the political volatility expected in US ahead of the presidential elections. EUR downside risks likely to remain for next 4 – 6 weeks until the outlook on Coronavirus turns!!
Commodity Bloc: Week Ahead – Australia & Canada
- AUD & CAD: January Labor Force: Citi employment forecast; -1.3k, Previous; 28.9k; Citi unemployment rate forecast; 5.2%, Previous; 5.1%; Citi participation rate forecast; 66%, Previous; 66% - there could be some noise in the Australian January labor force survey because of the bushfires across South-East Australia. A number of important data releases (including retail sales) will put the final touches on Citi analysts estimate for Canada’s Q4 real GDP growth (Citi currently at 0.8%). Headline CPI should remain at 2.2%YoY, but core measures are key.
Asia EM: Economic fallout and policy responses from Covid-19
- CNY: Covid-19 likely economically worse than SARS for China and globally - Growth impact from the demand-side comes from China's broad demand slowdown, more specifically from tourism and hit to resident demand for services. HK, Thailand, Singapore come out more vulnerable on the services side; Korea and Taiwan on weaker China growth. Growth impact from supply-side disruptions from intermediate goods trade indicate Vietnam and Korea are more vulnerable; Singapore has short term disruption from labor shortage. Citi analysts downgrade growth in the region by 0.4ppts on the assumption that outbreak can be contained by end-March.
- CNY: Week Ahead: China - Citi analysts expect the 1-yr Loan Prime Rate (LPR) to be cut by 10bp to 4.05%. Data wise, Citi analysts expect China YoY growth of China’s M2 to rise by 0.1ppt to 8.8%YoY in January and M1 to grow at 5%YoY in January. New RMB loans (Citi: RMB3,000bn) and TSF data (Citi: RMB4,000bn) may accelerate in January.
This is an extract from the Daily Currency Update, dated February 17, 2020. Please approach a Citigold Relationship Manager if you would like more information.