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USD fundamentals turning negative; Investors still maintaining exposure to safe havens (JPY, Gold) as uncertainties remain a feature of 2020

USD fundamentals turning negative; Investors still maintaining exposure to safe havens (JPY, Gold) as uncertainties remain a feature of 2020

  • -->USD: The December Fed FOMC meeting (backed up by the Fed minutes release on Friday) shows a more dovish Chair Powell, coming close to ruling out 2020 hikes with risks to the downside, suggesting cuts are still more likely than hikes - explicitly stating that in “his view” the only case where the Fed would raise rates would be a “persistent, significant” rise in inflation.  
  • USD: US data struggling – (1) The recently released December US Consumer Confidence report sees its director saying “….there is little to suggest growth, and in particular consumer spending, will gain momentum in early 2020.” (2) The recent US durable goods orders report also offers little evidence of a pick-up in industrial activity and business investment expected in 2020. (3) And last Friday, US December ISM manufacturing shows a decline to 47.2 with new orders, production, and employment subcomponents dropping to 46.8, 43.2 and 45.1, respectively,  revealing continued weakness with little sign of a substantial near-term rebound.  
  • USD: Outlook increasingly bearish - Fed Chair Powell’s relatively dovish message likely signals an on-hold stance for 2020 with the bias to lower rates. USD remains vulnerable as US short rates are currently pricing only one final 25bp Fed rate cut in 6 months’ at best and not positioned for a more material slowdown of the US economy and deeper Fed rate cuts. This week, all eyes will be on the spike in Mid East tensions from Friday. Data wise, Citi analysts expect US ISM non-manufacturing at 55.2, December nonfarm payrolls at 175k with the unemployment rate at 3.5% and hourly earnings growth at 0.2%MM. Fed speakers include Clarida (voter), Williams (voter), Evans (2020 non-voter) and Bullard (2020 non-voter).
  • Safe Havens (JPY & Gold): Finish the week strongly as Mid – East tensions ratchet up and add to the list of geopolitical risks for 2020. And while US – China trade tensions may have eased somewhat as both sides move to sign Phase One on January 15, removal of tariffs will only come in phases while other areas such as intellectual property, technology transfer, agriculture, financial services, FX transparency, and dispute settlement are yet to be negotiated. Therefore, trade tensions between the US and China will likely continue to be a feature of 2020. Adding to these tensions are the escalating political risks within the US following Trump’s impeachment – all of which is likely to see continuing demand for safe haven currencies. 

 

EUR: Citi analysts see upside euro zone growth surprises in 2020 

  • EUR: December ECB meeting highlights relative optimism on the euro zone outlook - signs of stabilization in growth, admission that the low may be in cyclically, downside risks less pronounced and no signs of Japanification. ECB chief Lagarde also makes no mention of EUR which suggests that the exchange rate as an explicit growth channel is off the table. Citi analysts now also see upside surprises for euro zone growth in 2020, expecting the manufacturing recession to fade and growth to come back in line with trend in 2020. Citi analysts also expect euro zone core inflation to creep higher and Lagarde’s ECB to likely approach its monetary strategic review this month more cautiously than her predecessor (Draghi) would have.  
  • EUR: But euro zone data remains mixed with euro area manufacturing PMI in December failing to maintain the timid gains recorded in the past couple of months, though offset by  Germany’s Ifo rebounding to 6-month high. At the same time, the German December CPI print on Friday surprises to the upside at 1.5%YoY vs 1.4% expected  (1.1% prior) which more broadly feeds into the view that the new ECB is likely to be more hawkish especially as ECB chief Lagarde is skeptical of the benefits (and more mindful of the costs) of ultra-easy policy.
  • EUR Outlook: A leading beneficiary of USD weakness in 2020? - With ECB no longer a bearish factor for EUR given the likelihood of a more hawkish ECB under Lagarde, the outlook for EUR looks more constructive as reserve managers continue to diversify away from USD and European investors having under hedged their US fixed income exposure may re-hedge. In addition, the EUR could increasingly be a safe-haven currency as the net foreign investment position of the euro zone is no longer in deficit. A fiscal boost or a more conclusive euro zone recovery would likely add more significantly to EUR bullishness. This week in the euro zone, Citi analysts expect euro zone  HICP at 1.3%YY, December ESI at 101.5 and German industrial production 1.1%MM.

 

GBP: New optimism from the Bank of England 

  • GBP: BoE: New optimism, but may still be too early to call off rate cut expectations - The most recent BoE meeting sees policy settings and guidance unchanged but the BoE minutes appear more upbeat, citing excessive labor cost growth, seeing the UK election result as positive for forecasts and a better global backdrop ahead. The BoE meeting and minutes support the Citi analyst view that the Bank is not on the verge of a rate cut.  
  • GBP Outlook: Sterling remains a solid “buy the dip” story - The late December dip to a 1.2904 low in cable was predicated on fears that PM Johnson’s bid to legally end the transition period in 12 months’ by 31 December 2020 may prove to be too short a time to seal an FTA with the EU and a failure to do so will likely see the return of No Deal” Brexit fears. However, PM Johnson so far, has shown a capacity to surprise to the upside and the clearing of this uncertainty in H1 should catalyze further GBP upside by closing the structural underweight positioning in UK assets and GBP. Real money has yet to turn into buyers, asset allocation polls show UK assets are under-owned, and ETF trends suggest room for equity buying.

 

Commodity Bloc: Canada still likely economic outperformer with Citi analysts still cautious on Australia and neutral on NZ 

  • AUD: Australia’s strong November employment data is offset by dovish RBA minutes – Even as Australia’s unemployment rate ticks lower to 5.2% from 5.3% in November, the RBA minutes show that the central bank will likely reassess Australia’s economic outlook at its February meeting (Citi analysts expect RBA to lower growth and inflation forecasts). Citi analysts expect RBA to cut rates again in February and if the economy remains unresponsive in H1’2020, then the prospects of an additional rate cut and unconventional monetary policy will likely increase
  • NZD: NZ GDP data neutral for RBNZ and 1.00% OCR likely represents the low -NZ Q3 GDP expansion by 0.7% vs 0.5% consensus highlights robust consumption and government spending. However, the data comes with a substantial downgrade to Q2 growth and overall, Citi analysts see the data as neutral for RBNZ. That said, NZ is still seen growing faster than most other AEs and expect RBNZ to keep an unchanged 1.00% OCR in 2020 though with risks to the downside.
  • CAD: Canada 2020 outlook: The Roaring 20s or Recession? Probably Neither - Citi analysts base case is that Canadian activity continues to grow at a solid pace with strengthening consumption, housing, and investment and with a strong labor market and rising incomes providing underlying support for household spending while inflation is expected to remain consistently close the BoC’s 2% target this should see the BoC keeping rates unchanged throughout 2020.

 

Commodity Bloc Outlook: Resilient vs USD but underperforming on non-USD crosses  

  • AUD: Looks to be a “buy on dips” versus USD notwithstanding RBA caution - Weak domestic data should keep the RBA on an easing path through a February 25bp rate cut though this appears more than fully discounted into AUD short rates (-36bp cumulative until September 2020). Beyond February 2020, risks become more 2-sided with improving dynamics both globally and domestically potentially lending more robust support to AUD into the back half of the year.
  • NZD: Still seen to outperform AUD at least until the February RBA meeting where a further 25bp cut is expected whereas the RBNZ OCR is now seen unchanged at 1.00% for this year. Upside risks to the NZD outlook include: (i) a boost to domestic growth from fiscal spending; (ii) a stronger recovery in the global economy and increased risk appetite among investors.    
  • CAD: Also seen firm versus USD but may be eclipsed by better performers such as EUR and GBP - CAD remains on the more bullish spectrum within G10 though scope for outperformance against its G10 peers may be limited. This view stems from (i) the Canadian economy’s ability to weather the trade uncertainty storm through 2019; (ii) the fiscal channel – both factors seem largely in the price. However, escalating Mideast tensions should push oil prices higher, lending short term support to CAD. This week sees an appearance by BoC Deputy Governor Wilkins who has been relatively dovish and Canada’s December jobs data where Citi analysts expect a strong bounce-back in job growth but with y-o-y wage growth moderating.  

 

Asia EM: Chinese data stability and inflows lending support to RMB while SGD is seen to be vulnerable to MAS easing risk

  • RMB: China’s December official manufacturing PMI prints at 50.2, (50.1 expected, 50.2 prior), with substantially improved production outweighing declines in new orders and inventories while the official December non-manufacturing PMI comes in slightly weaker, falling to 53.5 vs 54.4 prior. Citi analysts see recent Chinese data pointing to stabilization and the team is constructive going forward, forecasting China’s Q4 GDP growth at 6.1%YoY (6.0% in Q3).  
  • RMB: China bond and equity inflows pick up with Index inclusion - Bond market inflows into China rebound in November following a weak October, rising to US$9bn from US$2bn which likely reflects index investors stepping up China allocation, given on-going Bloomberg-Barclays Global Aggregate Index Inclusion (China is now ~2.4%). Given China’s index weightage would likely reach 6% by November 2020, Citi analysts expect foreign investors to step up their China allocation further. This is likely to see RMB stabilizing with an appreciating bias further aided by corporates increasing their FX conversions into RMB ahead of Chinese New Year.
  • RMB: CFETS Index tweak reflects trade weight changes, signals reduced USD influence - CFETS announces an adjustment to its basket weights, effective January 1st. Changes include USD (-0.81%), EUR (+1.06%), HKD (-0.71%), AUD (+0.80%), and RUB (+1.02%). There is no change in composite currencies. Among the baskets, CFETS is the primary basket applied in daily USDCNY mid-point fixing and the most important basket which the RMB is explicitly managed against.
  • RMB: Week Ahead: China - December / Q4 data preview – further signs of stabilization – (1) Citi analysts maintain their China GDP growth forecast at 6.1%YoY for Q4 and 6.2%YoY for 2019E as growth shows increasingly greater signs of stabilization. In particular, manufacturing PMI has returned to expansion after contracting for six months. (2) China’s FAI growth may edge up to 5.4%YoY YTD in December but China’s retail sales growth may dip to 7.8%YoY in December. (3) China’s CPI inflation is expected to pick up to 4.7%YoY in December, and PPI deflation may also narrow to -0.2%YoY. (4) China’s FX reserves are expected to rise by US$24.5bn to US$3,120.1bn in December from a month ago on the back of weak USD while (5) Chinese M2 is expected to rise by 0.1ppt to 8.3%YoY in December from a month ago. Finally, (6) Chinese new RMB loans and TSF data may moderate in December but likely keep robust pace of expansion – Citi analysts expect new RMB loan to fall to around RMB 1.0trn in December from RMB1.39trn in November.
  • SGD: Singapore - Gradual but uneven recovery in 2020 leaves a 30 – 40% chance of MAS easing in April - Q4’19 AE GDP rises a weaker than expected 0.1% QoQ SAAR (Citi: 0.3%, consensus 0.4%), but is partly a result of upward revisions in 3Q GDP (0.7% YoY, 2.4% QoQ SAAR, up from 0.5% YoY, 2.1% QoQ SAAR). Citi analysts reiterate their expectation for a gradual but uneven recovery in 2020 with the 2020 GDP forecast of 1.8%.  Disinflation pressures to see 30-40% chance of MAS slope reduction - With Singapore’s growth marginally better than MAS’s October expectations, but core CPI tracking slightly below MAS’s forecast for 4Q19, slope flattening is not the Citi base case, but the risk (30-40% odds) nonetheless remains high.

 

 

This is an extract from the Daily Currency Update, dated January 6, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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