- Sources close to the Fed Chair selection process overnight indicate ex Fed Governor Kevin Warsh and current Governor Powell are the potential front-runners for the Fed Chair with Treasury Secretary Mnuchin said to be favoring the latter. Powell is perceived as being relatively dovish compared to Warsh. Markets react to the news via a modest selloff in USD and lower US bond yields.
- Much focus on developments in Catalonia overnight with the region’s leader saying he may declare independence from Spain. The Spanish Constitutional Court is likely to rule against such a motion and potentially trigger article 155 of the Constitution to strip out Catalonia’s autonomy and call for regional elections. The impact of this though is felt in fixed income (Spanish bonds) than the currency. More relevant for EUR is the prospect of German Chancellor Merkel throwing her support behind Jens Weidmann as ECB chair (arguably the favorite and more hawkish) following German election results. This may lead markets to eventually revisit their view on ECB policy.
- Brexit uncertainty heightens - The Conservative Party Conference concludes tonight with Bloomberg reporting the “UK is said to fear EU reluctance will force a no deal on Brexit” on a future trade agreement with the EU. Meanwhile, the Guardian reports the EU Parliament will be “voting on a resolution saying the UK and the EU have not made enough progress in the Brexit talks to justify moving on to phase two related to a future trade deal. The resolution is expected to be passed by a large majority”. Citi analysts continue to maintain that political uncertainty is likely a significant enough drag to potentially delay any BoE tightening, particularly should data remain soft.
USD: Broad based rally fading
- The key data release this week is the US September non-farm payroll report on Friday. Citi analysts expect just +70k new payrolls (consensus +80k versus +156 prior) but the data is likely to be heavily impacted by Hurricanes Harvey and Irma leading markets to ignore the headline drop. The change in average hourly earnings though still remains key for the US inflation outlook. Citi analysts expect a consensus +0.3% MoM and +2.6% YoY, but see more upside than downside risks that may further firm up the odds of a December hike.
- The technical picture for USD though looks mixed with USDJPY the exception where Japan election concerns appear to be adding to the yen’s overall weakness.
EUR & GBP: Stronger support seen in EUR, sterling hampered by weaker UK data
- Stronger euro zone data and the prospect for a new (and more hawkish) ECB president after Mario Draghi’s term expires in late 2018 are likely to put a stronger floor underneath EUR. In the near term though, investors are likely to wait for the October ECB meeting (October 26) as the next EUR specific catalyst before making a stronger committing towards EUR. Ahead of that comes this Thursday’s ECB Minutes of the last meeting that is likely to highlight the signaling value of longer QE guidance and its influence on short-rate expectations.
- Weaker UK data with construction PMI overnight much lower than expected at 48.1 (vs. 51.1 consensus), the first time business activity in the sector has dropped for 13 months and with Markit noting that the "UK construction sector has moved back into reverse gear during September". Positioning also remains unfavorable for sterling with added scope for investors to re-engage in bearish GBP positions as political risk premia re-asserts itself.
Commodity Bloc: AUD seen vulnerable, NZD awaits Oct. 7 vote count
- The RBA statement yesterday continues to point to neutral rates for the foreseeable future though AUD weakens on the back of expanded comments on macro-prudential measures on housing, which suggest that there is little pressure on the RBA to adjust its rates stance to contain housing. Citi analysts continue to expect policy to remain unchanged until Q4 2018 which leaves AUD at the mercy of external events (Fed rates and the commodities outlook).
- NZD remains in the lurch for now following the general elections as the NZ First party indicates it will not start negotiations for a coalition government with PM Bill English’s National Party (that won 58 seats but short of a majority of 61) until the counting of special votes on October 7. There is a real risk of a quick reversal though, if negotiations go well, as New Zealand’s fundamentals remain strong.
Asia EM: PBoC cuts the RRR, Singapore’s MAS likely to keep policy unchanged
- Market Implications of the Targeted RRR Cut by the PBoC - The new targeted RRR cut is likely to see China’s bond and rate markets rally modestly after the Golden Week holidays this week and supported by the moderating economic momentum in China. This could pressure RMB (albeit modestly) as yield differentials drive FX conversion.
- The Monetary Authority of Singapore (MAS) may likely announce its Monetary Policy Statement on 13 October. Citi analysts foresee no change in the policy (65% probability). However, MAS’s increased confidence over the broadening recovery into domestic demand – alongside lower-than-expected job market slack – suggests a less dovish tilt in assessing risks to its inflation outlook. This could pave the way for normalization in 2018, even if the “extended period” language is retained.
This is an extract from the Daily Currency Update, dated 4th October. Please speak to a Citigold Relationship Manager for more information.