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USD rally continues especially against euro as markets ignore US political risks for now; Neutral RBNZ supports 1.00% terminal rate

-->USD rally continues especially against euro as markets ignore US political risks for now; Neutral RBNZ supports 1.00% terminal rate                          
  • USD: A refocus back to US political risks: New Hampshire update – Bernie Sanders wins the New Hampshire primaries with Buttigieg coming in second. The bigger surprise is Klobuchar who catapults to third with further disappointment for Joe Biden (a distant fifth).  The results once again reinforce the view that Sanders risk remains underpriced and that Biden is losing momentum. More important though will be the Nevada caucus on February 22, as this will be a better proxy for Super Tuesday (when 1/3 of delegates are awarded).               
  • USD: CPI Preview (data due tonight) – Citi analysts expect US January CPI to support core PCE returning to 2% and see a solid 0.21%MoM increase in January, with moderate increases in components of underlying inflation but with relatively more strength in transitory factors. The data though is unlikely to be strong enough to price out expectations of Fed cuts this year (US rates currently price slightly more than 40bp of cuts before year-end), given that risks remain tilted to the downside on coronavirus concerns – such sentiment is likely to cap any post CPI rally in USD.   
  • NZD: RBNZ statement now neutral with a slight hawkish bias; Key highlights (1) The RBNZ keeps the cash rate unchanged at 1% with the Bank noting “…employment is at or slightly above its maximum sustainable level while consumer price inflation is close to the 2% mid-point of our target range”. (2) RBNZ’s growth forecasts are reduced for 2020H1, reflecting a hit from the novel coronavirus, but upgraded for 2020H2, based on higher fiscal stimulus, higher house prices and a terms of trade boost as the RBNZ believes that the impact of the coronavirus will likely be temporary. Indeed, the RBNZ assumes that the outbreak is likely to be contained by end of February, and economic activity likely to return back to normal from March onwards. (3) While Governor Orr suggests that the Board feels “the need to keep rates at the low level for a prolonged period to meet its inflation objective”, the Bank not only removes its short-term easing bias but now projects a full rate hike of 0.25% by Q3’2021 despite a higher projection for NZD TWI (trade weighted index) than that in November. The RBNZ also removes the sentence ”it will remain prepared to act as required” in the November statement.     


EUR: EZ hard data disappoints but Citi analysts see better times 

  • EUR: A sharp fall in euro zone December industrial production, 3rd successive quarterly decline but better signals ahead Euro zone industrial production drops -2.1% MM in December (largest monthly drop since Feb-16) after 0.0% in November (revised down from +0.2% MM). This leaves Q4 industrial output down -1.4% QQ, the third successive quarterly decline and at -4.1% YY in December after -1.7% YY in November. Bottom line - a poor December snapshot, ending 2019 on an extremely weak footing. Going forward however, Citi analysts expect to see a rebound in manufacturing PMI in January and the better tone in sentiment surveys more broadly, alongside clear evidence of a bounce in the euro zone composite leading indicator that signals better times ahead. But risks are probably skewed to the downside, depending on how disruptive the coronavirus will be on global supply chains towards the end of 1Q-20.    
  • EUR Outlook – Following the weaker industrial production data overnight (hard data), markets seem to be consciously repricing European growth and also perhaps thinking about the impact that a fiscal package will have on Europe’s current account surplus. However, this may also provide an early test of the resolution of the US Administration to use its new Currency Rule powers. Meanwhile, euro zone front end rates now price roughly 6bp of ECB rate cuts by year end (60% chance of a 10bp cut) on fears that the EU-China supply chain will likely take a hit from the Coronavirus outbreak.       


Commodity Bloc: Neutral RBNZ supports 1.00% terminal cash rate; Australian consumer confidence up                                

  • NZD: Following the RBNZ meeting yesterday, Citi analysts retain their call for the RBNZ terminal cash rate to remain at 1.00% in 2020. That said, the odds of rate cuts still remain larger than rate hikes. The impact of Coronavirus on New Zealand will remain a source of uncertainty, and a larger than expected impact could see the RBNZ turn more dovish. In particular, the Bank still expects the stable world economy to continue but this could change with negative coronavirus surprises, which have already forced economists to lower China and world growth forecasts.  
  • AUD: Australia: Nice bottoming signal in consumer confidence - Westpac consumer confidence index rises to 95.5 in February versus 93.4 last. Details of the survey show expectations for the Australian economy 1 and 5yrs ahead in addition to intentions to buy major household items, bouncing surprisingly strongly in February. The data follows the improvement in Australia’s January NAB business confidence to -0.8% from -2.5% in December, signaling that Australian indicators are now starting to price in the cyclical recovery.      


Asia EM: SGD under pressure on Coronavirus fears  

  • SGD: Is under pressure overnight as another coronavirus case is reportedly confirmed in Singapore’s financial district. Reiterating heightened risk of slope flattening in April (at least 40% odds) - Following the swift de-facto easing last week, whether MAS actually flattens the slope still hinges on how data and outlook have evolved by April. Events remain highly fluid, but MAS’s acknowledgement that economic conditions have weakened suggests the risk that the criteria for a slope flattening will likely be met, has materially increased.     


This is an extract from the Daily Currency Update, dated February 13, 2020. Please approach a Citigold Relationship Manager if you would like more information.



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