USD under pressure as China’s recovery, vaccine, US fiscal and Brexit optimism override lockdown restrictions in Europe and US

USD under pressure as China’s recovery, vaccine, US fiscal and Brexit optimism override lockdown restrictions in Europe and US  

• Euro bloc & USD: Vaccine rollout continues in Europe with the European Medicines Agency bringing forward its meeting on vaccine approval to Dec 21 from Dec 29. In the US, Operation Warp Speed officials indicate some 20mn people should be able to get their first shots by year-end. At the same time however, news overnight confirms Germany’s “hard” lock-down starting tonight which may be extended to January while Dutch PM Rutte announces a 5-week lockdown as does Italy for the Christmas break. In the UK, London shifts into tier 3, the highest tier of Covid restrictions which means 34mn (around half the UK population) will likely be subject to the strictest rules despite the rollout of vaccines. And in the US, New York City indefinitely bans indoor dining while Governor Cuomo confirms NY City may move toward a 2nd full shutdown “If we do not change the trajectory…”.     

• USD: US fiscal deal possible by Friday? – a US bipartisan committee announces it would be unveiling a fiscal relief package that offers a compromise for issues such as business COVID liability waivers and state/local aid. Markets will watch for approval of any package by Senate Majority Leader and Republican McConnell. Note the Citi analyst base case remains for the US Congress to pass a package near the USD1tn mark before the December 18 spending bill deadline.      

• GBP: Likes the Brexit buzz – there could be a Brexit deal this week according to BBC news sources overnight. This sees GBPUSD rally back up to 1.3438. WSJ suggests that "a deal is not certain but very possible“ while other sources hint at Brexit negotiations into the new year. 2 key signposts to watch in the days ahead – (1) whether leader of the European Research Group within the Conservative Party Jacob Rees-Mogg, also the leader of the House announces that the House of Commons will sit next week to debate and approve any deal. (2) Any sign that the French position is changing – watch for any discussions between UK PM Johnson and French President Macron.  

• CNH: China’s recovery is on track but easy policy likely to remain even as PBoC turns more hawkish - China’s November in-line data (see Data Releases next page) suggests broad-based recovery in both production and demand and in the next few months, Chinese exports should hold up given the global production capacity gap to be filled. Citi analysts also think the ongoing industrial reflation and improving industrial profitability are conducive to an industrial capex upcycle ahead, an important market theme unfolding. On the policy front though, near-term CPI deflation (partly due to the base effect) and recent credit market stress, as well as seasonal liquidity uncertainty around the Chinese New Year, suggest a quick exit of policy easing remains unlikely.                    

Escalating Australia/China trade tensions not a big enough issue for global markets but relevant to AUD           

• AUD: As political and diplomatic tensions become interlinked with trade, news overnight is that China has blocked Australian coal exports with more than 50 ships carrying Australian coal now stranded off China after ports were verbally told in October not to offload such shipments. The Global Times reports that China’s National Development and Reform Commission on Saturday has formalized those curbs after giving power plants approval to import coal without restrictions, except from Australia.   

• AUD: Australian coal exports to China amount to AUD13.71bn annually and Citi analysts state that “if the moratorium on Australian coal exports were sustained, it would likely be a large dent to export earnings for Australian producers because finding alternative markets in the short-term won’t be easy.” While Australia could take the case up to the WTO, it will be months before anything can be done. Citi analysts also see limited scope for de-escalation - the biggest concern for markets would be if iron ore becomes a target as it could inflict severe damage on Australia’s growth – this seems unlikely for now because 50% of Chinese iron ore demand is met by Australia but events need to be closely watched and the situation may also warrant caution from the RBA, with the December minutes likely to acknowledge the effect of certain import bans.   

Data releases overnight

• USD: Manufacturing production still rising despite global lockdowns - industrial production rises 0.4%MoM in November, with a 0.8% increase in manufacturing production. This is another solid increase that reaffirms US activity broadly has not slowed substantially despite new activity restrictions as a result of rising virus cases. Citi analysts expect an already faster bounce-back in new durable goods orders should likely continue to pull production higher over the coming months.     

• GBP: In the three months to October, UK total employment falls by 143k on a 3M/3M basis (consensus -250k). But hours worked continue to grow strongly, reflecting the reopening over the summer even as the headline unemployment rate increases from 4.8% in the three months to September to 4.9% in October (consensus 5.1%). Meanwhile, total pay in the three months to October grows by 2.7% YY (consensus 2.2%) and regular pay by 2.8% (consensus 2.6%). Pay-E data suggests robust pay growth continued into November. Citi analysts expect UK unemployment to increase to 8% by the middle of 2021 though the Chancellor has mitigated much of the downside risks by announcing extensive fiscal support.   

• CNH: China’s data continues to point to a sustained recovery in 2021 - fixed asset investment improves steadily in November with headline FAI growth climbing from 1.8%YoY Ytd in October to 2.6%YoY Ytd, well in line with market expectations (Citi/Mkt: 2.5%/2.6%YoY Ytd).  Real estate investment (REI) continues to lead FAI growth while manufacturing investment (MI) is also up. Importantly, private FAI returns to growth and infrastructure investment (II) also recovers modestly as stimulus comes through. Retail sales also gain in real terms in November, up from 4.3%YoY in October to 5%YoY, in line with market consensus and industrial production remains strong in November, edging up from 6.9%YoY in October to 7%YoY (Citi/Mkt: 7.1%/7%YoY).     

This is an extract from the Daily Currency Update, dated December 16, 2020. Please approach a Citigold Relationship Manager if you would like more information.